Method and system for insuring against investment loss

ABSTRACT

Participants purchase into a given system for a given period of time. Those with investment gains, by definition, are without loss and need no compensation from the system. Those with investment losses are reimbursed by the system according to previously agreed upon terms. Total loss of a given system&#39;s participants is calculated, with that figure compared to the previously agreed upon amount of funds available for loss compensation (total revenue generated by participant premiums minus previously agreed upon detracted percentage for firm or a sum set forward by the company that is independent of a given system&#39;s generated revenue).

This application claims the benefit of U.S. Provisional PatentApplication Ser. Nos. 60/288,669, filed on May 4, 2001 and 60/299,084,filed on Jun. 18, 2001 both in the name of Brian Yolles and entitled“Investment Insurance Instrument And The Systems And Methods OfPotential Means Of Operation And Distribution”, which are incorporatedherein by reference.

BACKGROUND

1. Field of the Invention

The invention relates to investment instruments and more particularly toa method and system for creating and using a loss reduction fund tocompensate investors with investment losses.

2. Description of the Related Art

There are known insurance systems to compensate for various losses.There are also various techniques for controlling investment losses,such as through puts and calls. However, there is no technique orproduct that can be used by investors to spread risk of investment lossacross a group of investors, thereby offsetting or reducing investmentlosses.

What is needed is a method and system to spread or allocate investmentrisk over a number of investors, to provide reductions in investmentrisk in return for payment of a premium.

The preceding description and citation of the foregoing documents is notto be construed as an admission that any of the description or documentsare prior art relative to the present invention.

SUMMARY OF THE INVENTION

In one aspect, the invention is a system and method for sharing risk ofloss among a plurality of investment instrument holders. The method andsystem comprise aggregating premiums to form a loss reduction fund,where the premiums are at least partially contributed by the pluralityof holders. The method and system also comprise determining lossesincurred by the plurality of holders at a predetermined time, andreimbursing at least a portion of the losses incurred by the pluralityof investment instrument holders. Reimbursement to a particularinvestment instrument holder is at least partially determined by theloss of the particular investment instrument holder, with considerationfor losses of the plurality of investment instrument holders.

In another aspect, the invention is a system and method for creating aloss reduction fund. The method and system comprise defining aninvestment category for the fund and associating a plurality ofinvestment instruments with the investment category. The method andsystem further comprises calculating premiums for each investmentinstrument, where the premiums are held by the fund and at leastpartially used to reimburse losses of the investment instruments.

In another aspect, the invention is a system and method for allocatingfunds from a loss reduction fund. The method and system comprisedetermining respective losses of a plurality of investment instrumentsand determining funds available in the loss reduction fund. The methodand system further comprises calculating a loss threshold and allocatingfunds from the loss reduction fund according to the threshold.

The foregoing specific objects and advantages of the invention areillustrative of those which can be achieved by the present invention andare not intended to be exhaustive or limiting of the possible advantagesthat can be realized. Thus, the objects and advantages of this inventionwill be apparent from the description herein or can be learned frompracticing the invention, both as embodied herein or as modified in viewof any variations which may be apparent to those skilled in the art.Accordingly the present invention resides in the novel parts,constructions, arrangements, combinations and improvements herein shownand described.

BRIEF DESCRIPTION OF THE DRAWINGS

The foregoing features and other aspects of the invention are explainedin the following description taken in conjunction with the accompanyingfigures wherein:

FIG. 1 illustrates an embodiment of a system according to the invention;

FIG. 2 illustrates an embodiment of loss compensation according to theinvention;

FIG. 3 illustrates an embodiment of a method according to the invention;

FIG. 4 illustrates an embodiment of a method according to the invention;

FIG. 5 illustrates an embodiment of a method according to the invention;

FIG. 6 illustrates an embodiment of loss compensation according to theinvention;

FIG. 7 illustrates an embodiment of loss compensation according to theinvention;

FIG. 8 illustrates an embodiment of loss compensation according to theinvention; and

FIG. 9 illustrates an embodiment of loss compensation according to theinvention.

It is understood that the drawings are for illustration only and are notlimiting.

DETAILED DESCRIPTION OF THE DRAWINGS

The instant invention allows an investor to participate in a fundproviding reimbursement for losses incurred over specific terms orperiods of time. In one embodiment, losses greater than a thresholdlevel (e.g., a percentage) are reimbursed from the fund and losses lessthan the threshold level are absorbed by the individual investor. Inanother embodiment, losses less than a threshold level (e.g., apercentage) are reimbursed from the fund and losses greater than thethreshold level are absorbed by the individual investor. In anotherembodiment, losses of the investor are reimbursed by another investor inreturn for an interest in future earnings or growth of the losinginvestor's portfolio. These and other embodiments are explained ingreater detail below.

The various combination of these embodiments have the ability tosignificantly limit investor losses.

System

Referring to FIG. 1, one embodiment of a system 100 according to theinvention includes a plurality of computers 102, 104, 106, 108, whichare interconnected by network 110. Network 110 is a wired or wirelesslocal area network or wide area network. In one embodiment network 110is the Internet. Each of computers 102, 104, 106, 108 include aprocessor 112, memory 114, fixed code storage 116, removable codestorage 118, input/output 120 and network interface 122, all of whichare interconnected by bus 124. Network interface 122 connects computers102, 104, 106, 108 to network 110.

General Illustrative

Suppose participants in the method and system of the instant inventionsuffer losses totaling $10 million, with a previously agreed upon sum ofloss compensation at $6 million. To compensate participants forsustained losses, the invention triggers a loss threshold mechanismwhereby the system designates a given percentage or dollar amount thatrepresents an amount of loss sustained by all system participants with aloss. For example, suppose there are 10 institutional participants in asystem who have losses totaling $10 million, with each institutioninvesting $5 million:

Participant A Loss $1,000,000 (20 percent of investment) Participant BLoss $1,500,000 (30 percent of investment) Participant C Gain: amountirrelevant Participant D Loss $500,000 (10 percent of investment)Participant E Gain: amount irrelevant Participant F Loss $1,000,000 (20percent of investment) Participant G Loss $2,000,000 (40 percent ofinvestment) Participant H Loss $250,000  (5 percent of investment)Participant I Loss $100,000  (2 percent of investment) Participant JLoss $3,650,000 (73 percent of investment)

Suppose the previously agreed upon sum of distributable losscompensation is $6 million. If participants indeed suffered $10 millionin losses and the system can compensate $6 million of these losses, thistherefore means that $4 million of sustained losses must remain losses.The allotment for loss compensation is made via the loss thresholdmechanism.

Loss Threshold Mechanism

Eight of ten institutional participants in the previous system sustainlosses, with an average loss of $1.25 million (25 percent ofinvestment). One embodiment of the loss threshold mechanism of theinvention works by assigning a percentage or amount of loss to each ofthese eight Participants With Losses (PWL). This figure applies to allPWL unless the figure is greater than a given participant's loss. Inother words, Participant 1, who lost 2 percent of its investment,receives no compensation if indeed all PWL must sustain a loss of 10percent according to the loss threshold mechanism.

The loss threshold mechanism functions first by adding up all minorlosses sustained by PWL. In the above example, a minor loss is one equalto or less than $500,000 (10 percent of investment). Hence the lossthreshold mechanism first concludes that three of the eight PWLsustained minor losses. These minor losses total $850,000, or 21.25percent of the $4 million figure representing the amount of sustainedlosses that must remain losses. As a result, the system distributes lossacross the remaining five PWL in such a way that they together sustain$3,150,000 in total losses.

The system divides $3,150,000 by five, the number of remaining PWL. Thisyields the figure of $630,000, which represents the amount of loss whicheach remaining PWL must sustain, i.e., all PWL will have their losseslimited to $630,000, or 12.6 percent of each investment. Participants D,H, and I—each of whom who did not sustain losses greater than $630,000(i.e., suffered minor losses)—will receive no compensation for theirlosses. However, those five PWL who lost greater than $630,000 will bereimbursed for all funds lost beyond $630,000. In this simplifiedexample, all of the investors have the same amount of investment,therefore allocation of a uniform percentage of loss is simple. However,it is very unlikely that all investor make the same investment.Therefore, determining a uniform percent of loss may be somewhat morecomplex, as discussed in greater detail below.

Hence loss compensation distribution is as follows:

Participant A Loss $1,000,000 (20 percent of investment) compensated$370,000 total loss limited to 12.6% Participant B Loss $1,500,000 (30percent of investment) compensated $870,000 total loss limited to 12.6%Participant F Loss $1,000,000 (20 percent of investment) compensated$370,000 total loss limited to 12.6% Participant G Loss $2,000,000 (40percent of investment) compensated $1,370,000 total loss limited to12.6% Participant J Loss $3,650,000 (73 percent of investment)compensated $3,020,000 total loss limited to 12.6%

Referring to FIG. 2, examples of the compensated and uncompensatedlosses of each security are illustrated.

Each participant to the system benefits in some fashion. First andforemost, the invention provides a guaranteed limit for all participantson their potential losses, depending on the amount of loss sustained byother participants. Participant J represents perhaps the most satisfiedsystem participant, for the system reduces his or her 73 percent loss to12.6 percent.

In this fashion, this system and method functions on ground similar tothat of insurance corporations, compensating those who suffer thegreatest amounts of damage. However, the method and system of theinvention does not currently exist, most likely due to concern of a“bear” market. The system and method presented here, however, isprofitable in any market, for under this method loss compensation islimited, and therefore allows for a revenue plan that is greater thanthe loss compensation. Hence the loss threshold mechanism serves to meetany and all market conditions.

Calculating the Loss Threshold

In the previous example, the 12.6 percent loss threshold represents thepercentage which serves to demarcate the PWL into two categories: thosewho receive loss compensation and those who do not. In other words,those PWL with losses less than 12.6 percent sustain those losses, whilePWL with losses greater than 12.6 percent are reimbursed for all losssustained beyond this level.

An apparatus or method which calculates this percentage represents partof the invention. Indeed it is this scalable figure which serve toinsulate market downfalls.

A more detailed example that demonstrates the means of calculating agiven system's loss threshold is provided below.

Revenue Generation

The previous example also makes evident the significant role of apreviously agreed upon sum of money which can represent the amount ofdistributable loss compensation funds. In this example, the figure of $6million represented this figure.

Two possible sources exist for these compensation funds. First, acompany practicing the invention can function as a subsidiary of a largecorporation and draw easily from corporate funds to set forward this sumand then work to ensure that revenue exceeds any given sum so as toguarantee a profit.

Second, a company practicing the invention can establish a schedulingsystem whereby the company agrees to “insure” a given number of sharesof a given security on a given date for a given period of time. Forexample, the company would agree to insure, for each trading day,100,000 shares of each security listed in the Dow Jones IndustrialAverage index for a time period of six months.

As part of this method and system, the company would charge a premiumthat correlates with the total transaction value, minus commission andS.E.C. fee, of a stock purchase. For example, for a $10,000 transaction,the cost for participation in the system could be set at 3 percent, or$300.

Referring to FIG. 3, an embodiment for creating the loss reimbursementfund starts at step 302 by selecting a group or sector of securities, apremium and a term.

At step 304, 306, investors enroll in the fund, and at steps 308, 310,system 100 waits until the term is reached.

At step 312, system 100 calculates the loss reimbursement threshold andamong for the participating investors.

Means of Division

In order to ensure the lowest possible loss threshold figure and therebyallow for the greatest number of compensated PWL clients, a companypracticing the invention may employ several strategies. For example, thecompany may group clients with like investments: by sector, by beta, orany number of other criteria. The company may group investments bypurchase price categories (e.g., all investors whose policies indicate apurchase of between $40 and $41). The company also could group investorsby trading day or hour, by index or average equity volume or dollaramount invested.

There may be many different “security class” systems to enable thecompany to ensure the lowest possible loss threshold and thereby allowfor the greatest number of compensated PWL clients (and hence thehighest degree of client satisfaction). The grouping strategies willlikely differ according to market conditions.

In one embodiment, a company practicing the invention focuses on clientswith long-term horizons who seek to purchase “blue chip” companies. Inthis embodiment, the company uses a scheduling system for the purchasingof policies (so as to enable the creation of “security classes,” andhence avoid overexposure to any one security), the company may alsotarget investors who utilize a dollar-cost averaging method of portfoliomanagement. Regardless of the focus, the desire for investment “peace ofmind” is significant given the burgeoning numbers of investors who arenow relying upon the securities markets for their retirement andchildren's educations.

The method and system may also work as part of the company web site oras part of financial service firm trading screens.

ANOTHER EXAMPLE

In this example, a company practicing the invention begins protectingclient transactions in DJIA securities beginning Nov. 1, 2000, withcoverage through Mar. 30, 2001 (approximately a five-month time frame).It is assumed here that the company utilized a scheduling system andinsured 100,000 shares of each DJIA security for each trading day.

The closing prices for each Dow security on Nov. 1, 2000, and Mar. 30,2001, respectively (Source: Commodity Systems, Inc., accessed via Yahoo!Historical Quotes), are as follows:

Nov. 1, 2001 Mar. 30, 2001 Security closing closing Alcoa Inc. $29.0625$35.9500 American Express Company $58.3750 $41.3000 AT&T Corp. $22.0000$21.3000 Boeing Co. $65.7500 $55.7100 Caterpillar Inc. $34.7500 $44.3800Citigroup Inc. $51.6870 $44.9800 Coca-Cola Co. $60.8750 $45.1600 Disney(Walt) Co. $36.6250 $28.6000 DuPont (E.I.) de Nemours & Co. $43.9375$40.7000 Eastman Kodak Co. $60.8750 $45.1600 Exxon Mobil Corp. $92.0625$81.0000 General Electric Company $54.4375 $41.8600 General Motors Corp.$61.3750 $51.8500 Hewlett-Packard Co. $44.4375 $31.2700 Home Depot Inc.$44.0625 $43.1000 Honeywell International Inc. $53.5000 $40.8000 IntelCorp. $44.8750 $26.3125 International Business Machines Corp. $98.5625$96.1800 International Paper Co. $36.0625 $36.0800 Johnson & Johnson$91.0000 $87.4700 McDonald's Corp. $31.6250 $26.5500 Merck & Co., Inc.$89.7500 $75.9000 Microsoft Corp. $69.6250 $54.6875 Minnesota Mining &Manufacturing $95.1250 $103.900 Company JP Morgan Chase & Co. $45.6875$44.9000 Philip Morris Companies Inc. $36.5620 $47.4500 Procter & GambleCo. $69.0000 $62.6000 SBC Communications Inc. $56.0625 $44.6300 UnitedTechnologies Corp. $68.6250 $73.3000 Wal-Mart Stores Inc. $46.6875$50.5000

Referring to FIG. 4, the steps for calculating a loss threshold areillustrated.

1. Calculate transaction value of each security class.

A “security class” signifies here a specific product category. Forexample, if a company practicing the invention were to insure 100,000shares of each security that comprise the Dow Jones Industrial Average,one “security class” could represent the firm's 100,000-share insuranceof Citigroup or Alcoa.

Although a company practicing the invention may establish a premiumutilizing several strategies, the example included here determinespremiums at the rate of three percent of transaction values. Thecalculation of transaction value of any given security class isperformed by multiplying the purchase price of the shares of a givenclass by the numbers of shares insured (100,000 shares in this example).

2. Calculate premium totals (i.e., revenue) for each security class.

EXAMPLE

If $69.6250 represents the purchase price for the security class ofMicrosoft (MSFT) and a company practicing the invention insures 100,000MSFT shares each trading day, of the 6-month term, the premium total forthe Microsoft security class is $208,875 (transaction value: $6,962,500,with three percent of this figure yielding company revenue of $208,875).

3. Calculate total revenue for a given system.

Total premiums for each security class in the system (e.g., securitiesin the Dow). (total revenue is $5,032,125)

4. Using the revenues, calculate an appropriate loss compensation fundfigure (step 402).

The “loss compensation fund figure” denotes the sum of money that acompany practicing the invention distributes to clients who sustainqualified losses.

In the example included here, the total revenue is $5,032,125 and theloss compensation fund figure is set at $5,000,000.

This is a variable step and is typically established at the beginning ofa coverage term. For example, due to a scheduling system, a companypracticing the invention is able to reliably anticipate future revenuesand thereby calculate an appropriate loss compensation fund for a givensystem in advance.

5. Get “end share price” information.

“End share price” may represent the sale price of the security or the 4p.m. closing value at the end of the covered term.

For the example included here, the “end share prices” represent theclosing trade values of Mar. 30, 2001, which represents an approximatelyfive-month time period following purchases on Nov. 1, 2000.

6. Calculate the percentage losses or gains for each security class.

EXAMPLE

with the purchase price for the Intel security class $44.88 and the “endshare price” $26.31, the system determines that 41.36 percent of theinvestment was lost (i.e., $18.56 per share) over the term of coverage.

In one embodiment, the system and method also includes a means to allowclients to monitor the statuses of their insured products. If onesecurity class shows a sizable loss but other securities have minorlosses or gains, it is probable that the client will receive significantcompensation from the system to cover much of the sustained loss.

NOTE: This method may also likely entail caps on loss, ensuring that noone security can drain the resources of a given security class. Caps arediscussed in greater detail below.

7. At step 402, system 100 calculates the total amount of loss dollarssustained by the system's clients. This is done by calculating theamount of loss dollars for each security class and adding these figurestogether.

EXAMPLE

In the example included here, the figure $20,375,000 represents thetotal amount of loss dollars sustained by all clients who purchased intothe system on Nov. 1, 2000, and remained covered by their policiesthrough Mar. 30, 2001.

8. Order the security classes according to their percentages of loss(step 406).

The example included here lists the security class showing the greatestgain at the bottom and the security class with the greatest loss at thetop.

Each appreciated security class is designated by the word “GAIN.”

Because these appreciated security classes do not need compensation fromthe system, they are automatically eliminated as candidates forcompensation and thus designated as such by the word “ELIMINATED.”

9. Using the total amount of loss dollars, calculate the total number ofloss dollars which the system must eliminate as unqualified forcompensation according to previously-agreed upon contract terms.

This calculation depends upon the figure representing the “appropriateloss compensation fund figure.” If the loss compensation fund is set at$5,000,000 and client losses total $20,375,000, the system musteliminate as unqualified a total of $15,375,000.

10. Using the unqualified losses, the system and method eliminates asunqualified the amount of sustained loss dollars according to contractterms (steps 408-420).

In one embodiment, this entails an elimination utilizing a lossthreshold percentage applied to all participants of a given system. If asecurity class suffers a loss greater than the loss thresholdpercentage, a portion of the sustained loss will be marked as qualifiedfor compensation; the portion of loss that is sustained below the lossthreshold percentage is marked as unqualified.

In the example included here, the system must mark a total of$15,375,000 loss dollars as unqualified. In one embodiment, the systemand method begins with the security class showing the lowest percentageloss. In this case, J.P. Morgan Chase represents this security class,sustaining a 1.72 percent loss. The system proceeds by eliminating asunqualified this loss. The number of loss dollars sustained as part ofthis 1.72 percent decline ($78,750) are registered separately andapplied against the $15,375,000 figure representing the number ofdollars which the firm must mark as unqualified.

Significantly, as previously explained, the system also calculates theamount of unqualified dollars which a 1.72 percent loss yields whenapplied to all other security classes with losses that are part of thegiven system. In other words, if the loss sustained by clients whopurchased into the J.P. Morgan Chase security class represents the onlysecurity class which the system must eliminate, then all other clientswith losses would deduct 1.72 percent from their sustained losspercentage to ensure equitable treatment of all clients with losses. If,however, such an applied percentage deduction yields a figure that isgreater than the amount of loss dollars needing to be markedunqualified, the system proceeds to Step Eleven and thereby utilizes aformula to calculate a percentage applied to all security classes withina given system.

In the example included here, the system necessitates 14 calculations todetermine that the loss threshold lies between 15.519 percent and 16.047percent. The first thirteen of these calculations are denoted“ELIMINATED-1,” “ELIMINATED-2,” “ELIMINATED-3,” “ELIMINATED-4,”“ELIMINATED-5,” “ELIMINATED-6,” “ELIMINATED-7,” “ELIMINATED-8,”“ELIMINATED-9,” “ELIMINATED-10,” “ELIMINATED-11,” “ELIMINATED-12,” and“ELIMINATED-13.” The fourteenth calculation, which informed the systemthat the marking of all losses sustained by clients of the McDonald'ssecurity class should not be eliminated and are hence not entirelyunqualified, is denoted “RESTORE-14/COMPENSATED.” This means that theMcDonald's loss percentage (16.047 percent) is greater than the system'sloss threshold and therefore that the total loss-dollars associated withthis security class should not be separately registered with the“wholly” eliminated security classes of the previous thirteencalculations (i.e., those with losses lower than the loss threshold).

This therefore also means that all security classes above McDonald's(i.e., those with loss percentages that are greater than the lossthreshold) have portions of their loss that are qualified forcompensation, namely the amount of dollars which represent the amountthat causes the security class's loss percentage to reside above thesystem's loss threshold. As can be noted on the chart, all securitieswith loss percentages greater than that of McDonald's (16.047 percent)qualify for some amount of compensation.

11. Calculate the exact loss threshold of the system, which is between15.519 percent and 16.047 percent.

Before proceeding to the formula, it is necessary to add up the totalnumber of dollars eliminated as part of the “wholly” eliminated securityclasses (i.e., those that are separately registered).

For the example included here, it is evident that the wholly-eliminatedsecurity classes (those from J.P. Morgan Chase to General Motors) yield7,448,250 loss-dollars which are marked unqualified. Because the systemoriginally determined in Step Nine that the system must mark asunqualified 15,375,000 dollars, it is necessary to now subtract7,448,250 from 15,375,000 to determine the number of dollars whichremain to be marked as unqualified. This subtraction yields the figureof 7,926,750.

To calculate the system's loss threshold, the system utilizes here thefollowing formula:x(transaction value of security class A)+x(transaction value of securityclass B)+x(transaction value of security class C)[ . . . ]=figurerepresenting the number of dollars which remain to be marked asunqualified(in this case, 7,926,750)

The variable here, representing the system's loss threshold, is denotedby x.

The left side of the equation should comprise all security classes withlosses that qualify for compensation.

Returning to the example provided here, the security classes from Intelto McDonald's should be represented:

x (transaction value Intel security class)

+x (transaction value of Hewlett-Packard security class)

+x (transaction value of American Express security class)

+x (transaction value of Coca-Cola security class)

+x (transaction value of Honeywell International security class)

+x (transaction value of General Electric security class)

+x (transaction value of Disney security class)

+x (transaction value of Microsoft security class)

+x (transaction value of SBC Communications security class)

+x (transaction value of McDonald's security class)

=7,926,750

This, in turn, yields:

x (4487500)

+x (4443750)

+x (5837500)

+x (6087500)

+x (5350000)

+x (5443750)

+x (3662500)

+x (6962500)

+x (5606250)

+x (3162500)

=7,926,750

This leads to the equations:51,043,750x=7,926,750x=7,926,750/51,043,750x=0.155293253

Hence the loss threshold for this system is 15.5293253 percent, meaningthat: All security classes with percentage losses above this thresholdsustain a loss up to—but no greater than—this figure.

Hence the system ensures that all participants will not sustain lossesgreater than 15.5293253 percent.

EXAMPLE

If a client purchased 100 shares of Intel on Nov. 1, 2000, at $44.88 pershare, held onto those shares through Mar. 30, 2001, and had purchasedan insurance policy for approximately $134 on Nov. 1, 2000, the clientwould be compensated $1,159 by this system on Mar. 30, 2001. Uninsured,this client would have suffered a loss of 41.365 percent, or $1,857.Because he or she was insured, however, the client only suffers a lossthat is limited to the system's threshold, which is 15.529 percent inthis case.

Significantly, the system is presently imagined as distributingcompensation to clients even if they do not sell their insuredsecurities in the open market. This therefore may represent asignificant value proposition for long-term investors.

Ideally, this system and method also includes the means by which thesecompensations are processed and delivered to clients.

Important note: As briefly noted earlier, the company practicing theinvention can employ several strategies to reduce the average lossthreshold and thereby increase client compensation. One strategy entailscomprehensive and complex diversification. Security classes also may beformed on the basis of sector, index, share price, purchase date,security beta, or any number of factors.

Sample: how a Scheduling System Might Work

1. On March 27, a client decides he or she wants to purchase 100 sharesof Intel. (INTC)

2. The client visits www.(company-name).com.

3. The client types in “INTC” and “100” (the number of shares desired)in the fields and clicks “submit.”

4. In response, the client learns:

The earliest date available to purchase protection for INTC stock is:

Apr. 16, 2001.

Estimated cost of six-month policy coverage: $87.

If you would like to make this reservation, please proceed onto StepFive.

5. Enter credit card or account information.

Name and address.

6. The client is then instructed:

On Apr. 16, 2001, purchase 100 shares of INTC through your broker.

On Apr. 16, 2001, return to www.(company-name).com.

Enter the purchase price of your shares.

(The firm may seek client permission to verify purchase price withbrokerage or request copies of the client's brokerage statement. Thefirm also may develop its own system whereby trade execution data forinsured transactions are immediately and automatically processed.)

The client is further informed:

-   -   You will be billed 3 percent of the total value of this        transaction, not including the commission of your broker.    -   (If you do not enter a purchase price, the company will assume        your purchase occurred at the highest ask price of the day.)

[The company also may have a “select your premium” program with a range,for example, of between 1 and 5 percent of transaction values dependingon the amount of the loss compensation fund desired by the client (andhence probability for compensation).]

7. The client is charged $87.

8. The client is then informed that he or she may sell his or her shareswhenever he or she wishes. If the client sells for a gain (or smallloss), the company may decide to reward this client with pointsapplicable toward frequent flyer miles, hotel and other incentiveprograms. This provides the firm with promotional opportunities topersons “in the money.”

If a client sells and suffers a significant loss, he or she may becompensated automatically via their brokerage account; provided withcredit toward additional insurance/protection policies; mailed a check;and/or a variety of other possibilities.

Upon the sale of insured securities, the client visitswww.(company-name).com and sign in. He or she will then see a screenshowing the shares that are insured. The client is provided theopportunity to enter the “sale” price. If at the end of the policy'scoverage period the client's sustained loss qualifies for compensation,the client's credit card or account will be credited.

Integration with Major Financial Services Firms

For several reasons it is in the best interest of financial servicesfirms to integrate this system and method within their operations. Thecompany would hope to become part of the trading screens of privateclient operations of financial service firms worldwide. Some of thebenefits the invention provides to financial services firms include:

Trade volume increases given perceived decreases in risk

Commissions from the sales of policies

Prevention of developing the “disgruntled” client who loses significantquantities of money to the market, blames the broker, and transfersfunds to a competing firm

Scalability

The system and method for the control or limitation of individual orinstitutional losses can be tailored to virtually any commodity orinvestment instrument that involves fluctuating market value, both inthe United States and around the world. These include:

Futures and options exchanges;

Real estate markets (protecting land by region, city, or state, forexample); and

Bond markets.

Reverse-Oriented Loss Threshold Mechanism

Referring to FIG. 5, an example of this embodiment is illustrated.

1. Calculate transaction value of each security class.

A “security class” signifies here a specific product category. Forexample, if a company practicing the invention were to insures 100,000shares of each security that comprise the Dow Jones Industrial Average,one “security class” could represent the firm's 100,000-share insuranceof Citigroup or Alcoa.

Although a company, practicing the invention may establish a premiumutilizing several strategies, the example included here determinespremiums at the rate of three percent of transaction values. Thecalculation of transaction value of any given security class isperformed by multiplying the purchase price of the shares of a givenclass by the numbers of shares insured (100,000 shares in this example).

2. Calculate premium totals (i.e., revenue) for each security class.

EXAMPLE

If $69.6250 represents the purchase price for the security class ofMicrosoft (MSFT) and a company, practicing the invention insures 100,000MSFT shares each trading day of the 6 month term, the premium total forthe Microsoft security class is $208,875 (transaction value: $6,962,500,with three percent of this figure yielding company revenue of $208,875).

3. Calculate total revenue for a given system.

Total premiums for each security class in the system (e.g., securitiesin the Dow). (Total revenue is $5,032,125)

4. Using the revenue, calculate an appropriate loss compensation fundfigure.

The “loss compensation fund figure” denotes the sum of money that acompany practicing the invention distributes to clients who sustainqualified losses (step 504).

In the example included here, the total revenue is $5,032,125 and theloss compensation fund figure is set at $5,000,000.

This is a variable step and is typically established at the beginning ofa coverage term. For example, a company practicing the invention is ableto reliably anticipate future revenues and thereby calculate anappropriate loss compensation fund for a given system in advance.

5. Get “end share price” information.

“End share price” may represent the sale price of the security or the 4p.m. closing value at the end of the covered term.

For the example included in the previous papers, the “end share prices”represent the closing trade values of Mar. 30, 2001, which represents anapproximately five-month time period following purchases on Nov. 1,2000.

6. Calculate the percentage losses or gains for each security class.

EXAMPLE

With the purchase price for the Intel security class $44.88 and the “endshare price” $26.31, the system determines that 41.36 percent of theinvestment was lost (i.e., $18.56 per share) over the term of coverage.

In one embodiment, the system and method also includes a means to allowclients to monitor the statuses of their insured products. If onesecurity class shows a sizable loss but other securities have minorlosses or gains, it is probable that the client will receive significantcompensation from the system to cover much of the sustained loss.

NOTE: This method may also likely entail caps on loss (discussed ingreater detail below), ensuring that no one security can drain theresources of a given security class.

7. Calculate the total amount of loss dollars sustained by the system'sclients. This is done by calculating the amount of loss dollars for eachsecurity class and adding these figures together (step 502).

EXAMPLE

In the example included in previous papers, the figure $20,375,000represents the total amount of loss dollars sustained by all clients whopurchased into the system on Nov. 1, 2000, and remained covered by theirpolicies through Mar. 30, 2001.

8. Order the security classes according to their percentages of loss(step 506).

The example included here lists the security class showing the greatestgain at the bottom and the security class with the greatest loss at thetop.

Each appreciated security class is designated by the word “GAIN.”

Because these appreciated security classes do not need compensation fromthe system, they are automatically eliminated as candidates forcompensation and thus designated as such by the word “ELIMINATED.”

9. Using the total amount of loss dollars, calculate the total number ofloss dollars which the system must eliminate as unqualified forcompensation according to previously-agreed upon contract terms (steps508-520).

This calculation depends upon the figure representing the “appropriateloss compensation fund figure.” If the loss compensation fund is set at$5,000,000 and client losses total $20,375,000, the system musteliminate as unqualified a total of $15,375,000.

10. Using the unqualified losses, the system and method eliminates asunqualified the amount of sustained loss dollars according to contractterms.

In one embodiment this entails an elimination utilizing a reversed lossthreshold percentage applied to all participants of a given system. If asecurity class suffers a loss greater than the loss thresholdpercentage, that portion of the sustained loss will be marked asunqualified for compensation and be applied against the figure yieldedby Step Nine; the portion of loss that is sustained below the lossthreshold percentage is marked as qualified for compensation.

In the example above, the system must mark a total of 15,375,000 lossdollars as unqualified. Toward this end, the method described herebegins with the security class showing the greatest percentage loss. Inthis case, Intel shareholders represent this security class, sustaininga 41.36 percent loss. The system proceeds by first eliminating the lossthat separates the Intel security class from that of Hewlett-Packard,the security class sustaining the second-greatest loss. Hewlett-Packardshares declined 29.63 percent during this time period. The systemsubtracts 29.63 from 41.36, yielding 11.73. This latter figurerepresents the percentage amount that the system first eliminates asunqualified for compensation.

The number of loss dollars sustained as part of this 11.73 percentelimination (about $526,384) is registered separately and appliedagainst the $15,375,000 figure representing the number of dollars whichthe firm must mark as unqualified. The system then looks at the securityclass that presents the third greatest percentage loss. In this case,that security class is American Express, whose shares sustained a 29.25percent decline. The system eliminates the loss percentage thatseparates the Hewlett-Packard security class from that of AmericanExpress. The system subtracts 29.25 from 29.63, yielding 0.38. Thispercentage amount is eliminated from the Hewlett-Packard total as wellas the Intel percentage loss. This yields, respectively, $16,886 and$17,053 unqualified sustained loss dollars. These are, again, registeredseparately and applied against the $15,375,000 figure representing thenumber of dollars which the firm must mark as unqualified.

This process continues until too many sustained loss dollars areeliminated as unqualified. When this occurs, the system reverses onestep and eliminates only the percentage amount needed to meet the$15,375,000 figure representing the number of dollars which the firmmust mark as unqualified. Returning to the example, the system goes sofar as to eliminate the loss percentage that separates the DuPontsecurity class from that of Johnson & Johnson (subtracting as well theJohnson & Johnson loss percentage figure from all security classes withgreater losses and applying the new unqualified dollar figures againstthe $15,345,000 figure) before realizing that this latter eliminationyielded a total number of about $15,545,545 unqualified sustained lossdollars, a figure that is $170,545 too many. This therefore means thatthe reversed loss threshold is between 3.88 percent and 7.37 percent,(i.e., we need to mark as qualified $170,545 additional dollars).

11. To calculate the system's reversed loss threshold, the systemutilizes here the following formula, where x represents the lossthreshold percentage:(Transaction value of security class A)(security class A percentage lossin decimal form)−(Transaction value of security class A)(x)+(Transactionvalue of security class B)(security class B percentage loss in decimalform)−(Transaction value of security class A)(x)+(Transaction value ofsecurity class C)(security class C percentage loss in decimalform)−(Transaction value of security class C)(x)+[ . . . ]=Figurerepresenting number of loss dollars that must be marked as unqualified

The left side of the equation should comprise all security classes withpartial losses that are among those marked as unqualified.

Returning to the example provided here, the security classes from Intelto DuPont should be represented:(Transaction value of INTC security class)(INTC security classpercentage loss in decimal form)−(Transaction value of INTC securityclass)(x)+(Transaction value of HWP security class)(HWP security classpercentage loss in decimal form)−(Transaction value of HWP securityclass)(x)+(Transaction value of AXP security class)(AXP security classpercentage loss in decimal form)−(Transaction value of AXP securityclass)(x)+(Transaction value of KO security class)(KO security classpercentage loss in decimal form)−(Transaction value of KO securityclass)(x)+(Transaction value of HON security class)(HON security classpercentage loss in decimal form)−(Transaction value of HON securityclass)(x)+(Transaction value of GE security class)(GE security classpercentage loss in decimal form)−(Transaction value of GE securityclass)(x)+(Transaction value of DIS security class)(DIS security classpercentage loss in decimal form)−(Transaction value of DIS securityclass)(x)+(Transaction value of MSFT security class)(MSFT security classpercentage loss in decimal form)−(Transaction value of MSFT securityclass)(x)+(Transaction value of SBC security class)(SBC security classpercentage loss in decimal form)−(Transaction value of SBC securityclass)(x)+(Transaction value of MCD security class)(MCD security classpercentage loss in decimal form)−(Transaction value of MCD securityclass)(x)+(Transaction value of GM security class)(GM security classpercentage loss in decimal form)−(Transaction value of GM securityclass)(x)+(Transaction value of MRK security class)(MRK security classpercentage loss in decimal form)−(Transaction value of MRK securityclass)(x)+(Transaction value of BA security class)(BA security classpercentage loss in decimal form)−(Transaction value of BA securityclass)(x)+(Transaction value of C security class)(C security classpercentage loss in decimal form)−(Transaction value of C securityclass)(x)+(Transaction value of XOM security class)(XOM security classpercentage loss in decimal form)−(Transaction value of XOM securityclass)(x)+(Transaction value of EK security class)(EK security classpercentage loss in decimal form)−(Transaction value of EK securityclass)(x)+(Transaction value of PG security class)(PG security classpercentage loss in decimal form)−(Transaction value of PG securityclass)(x)+(Transaction value of DD security class)(DD security classpercentage loss in decimal form)−(Transaction value of DD securityclass)(x)=15,375,000

This, in turn, yields:[(4487500)(0.4136)−(4487500)x]+[(4443750)(0.2963)−(4443750)x]+[(5837500)(0.2925)−(5837500)x]+[(6087500)(0.2582)−(6087500)x]+[(5350000)(0.2374)−(5350000)x]+[(5443750)(0.2310)−(5443750)x]+[(3662500)(0.2191)−(3662500)x]+[(6962500)(0.2145)−(6962500)x]+[(5606250)(0.2039)−(5606250)x]+[(3162500)(0.1605)−(3162500)x]+[(6137500)(0.1552)−(6137500)x]+[(8975000)(0.1543)−(8975000)x]+[(6575000)(0.1527)−(6575000)x]+[(5168750)(0.1298)−(5168750)x]+[(9206250)(0.1202)−(9206250)x]+[(4518750)(0.1172)−(4518750)x]+[(6900000)(0.0928)−(6900000)x]+[(4393750)(0.0737)−(4393750)x]=15,375,000

One step further:[1856030−4487500x]+[1316683.125−4443750x]+[1707468.75−5837500x]+[1571792.50−6087500x]+[1270090−5350000x]+[1257506.25−5443750x]+[802453.75−3662500x]+[1493456.25−6962500x]+[1143114.375−5606250x]+[507581.25−3162500x]+[952540−6137500x]+[1384842.5−8975000x]+[1004002.5−6575000x]+[670903.75−5168750x]+[1106591.25−9206250x]+[529597.5−4518750x]+[640320−6900000x]+[323819.375−4393750x]=15,375,000

One more step:[1856030−4487500x]+[1316683.125−4443750x]+[1707468.75−5837500x]+[1571792.50−6087500x]+[1270090−5350000x]+[1257506.25−5443750x]+[802453.75−3662500x]+[1493456.25−6962500x]+[1143114.375−5606250x]+[507581.25−3162500x]+[952540−6137500x]+[1384842.5−8975000x]+[1004002.5−6575000x]+[670903.75−5168750x]+[1106591.25−9206250x]+[529597.5−4518750x]+[640320−6900000x]+[323819.375−4393750x]19538793.13−102918750x=15,375,000

This leads to the equations:19538793.13−102918750x=15,375,000−102918750x=15,375,000−19538793.13−102918750x=−4163793.13x=−4163793.13/−102918750x=0.04045708999

Reversed Loss Threshold Percentage: 4.0457

Hence the reversed loss threshold for this system is 4.0457 percent,meaning that all losses below (or less than) this threshold arecompensated. This is illustrated in FIG. 6.

When combined with what is identified here as forward-oriented insurance(i.e., the method detailed above) a considerable measure of downsideprotection is secured.

EXAMPLE

Let us suppose a client purchased 100 shares of Intel on Nov. 1, 2000,at $44.88 per share, the optimal price for his or her security class.Let us suppose that no cap exists on the amount of insurable loss andthat he or she held onto these shares for a six-month time period,through Mar. 30, 2000, when the stock price closed at $26.31. Let ussuppose as well that this client had purchased on Nov. 1, 2000, bothforward-oriented and reverse-oriented insurance policies for anapproximate premium of $268. Uninsured, this client would have suffereda loss of 41.365 percent, or $1,857. Because he or she was“doubly-insured,” however, the client only suffered a loss of about11.52 percent, excluding commissions and policy purchases. (He or shereceived about $181 from the reverse-oriented system—4.0457 percent of$4,488, the transaction value—and approximately $1,159 from theforward-oriented system.)

Including policy purchases, the client's loss would have stood, aftercompensation, at about 17.49 percent. This loss could have been reducedfurther had the client written a covered call on his or her shares,receiving that premium, and if he or she had sold the declining sharesupon sustaining a 20 percent loss. For this reason, it is nowrecommended that this system operate with a cap of 20 percent oninsurable loss. This provides clients with the motivation to monitortheir investments and stem losses.

Cap on Reimbursement

In one embodiment, the system sets a cap on the amount of lossreimbursement. On example of a cap is illustrated in FIG. 7 Here, lossfrom zero to the loss threshold is uncompensated, and loss greater thanthe cap is uncompensated. However, loss that is greater than the lossthreshold and less than the cap is compensated.

Security Class Formation on a Running Basis

The following explains another embodiment for transactions designated tooccur on a running basis. This method eliminates the need for a systemthat utilizes a scheduling operation, but it is nevertheless possiblethat this method and that which utilizes a scheduling mechanism may workalongside each other.

In describing this embodiment, we will consider the pathway of onehypothetical equity transaction: one purchase on Feb. 1, 2000, of 3,000shares of Winn-Dixie Stores (symbol WIN, NYSE) at the price of $19.50per share.

Note on the Classification System Utilized Herein

This document utilizes the North American Industrial ClassificationSystem (NAICS), a method of classifying businesses that replacedStandard Industrial Classification in 1997.

According to the NAICS Association, the NAICS framework utilizes thefollowing hierarchy:

Industry Sector

Industry Subsector

Industry Group

Industry

One embodiment adopts the first half of this hierarchy. That is,classification will occur on the basis of Industry Sector and IndustrySubsector. In other embodiments, the method is extended to IndustryGroup and Industry.

Significantly, the NAICS divides economic activity into 20 sectors. TheManufacturing Sector, however, is too large for accurate equitydiversification, comprising 21 subsectors. Therefore, it is preferableto divide the Manufacturing Sector into nine semi-related groups, eachof which, for the purposes of this document's embodiment, will serve asits own sector:

1. Food Manufacturing

-   -   Beverage Manufacturing

2. Textile Mills

-   -   Textile Product Mills    -   Apparel Manufacturing    -   Leather and Allied Product Manufacturing

3. Wood Product Manufacturing

-   -   Paper Manufacturing    -   Furniture and Related Product Manufacturing    -   Printing and Related Support Activities

4. Petroleum and Coal Products Manufacturing

-   -   Nonmetallic Mineral Product Manufacturing

5. Plastics and Rubber Products Manufacturing

-   -   Chemical Manufacturing    -   Nonmetallic Mineral Product Manufacturing

6. Primary Metal Manufacturing

-   -   Fabricated Metal Product Manufacturing    -   Machinery Manufacturing    -   Transportation Equipment Manufacturing

7. Computer and Electronic Product Manufacturing

8. Electrical Equipment, Appliance, and Component Manufacturing

9. Miscellaneous Manufacturing

Hence the description of the invention uses the NAICS, but divideseconomic activity into 28 sectors.

Security Class Formation on the Basis of Sector and Subsector

As part of one embodiment, it is important to first define the ways inwhich a security class is formed. As an example, two different levels ofsecurity classes are initially formed.

All incoming orders for equity insurance are funneled into categoriesaccording to:

their Sector [e.g. Retail Trade, Manufacturing, etc.]; and

their Subsector [e.g. Food and Beverage Stores within the Retail Tradesector, Chemical Manufacturing within the Manufacturing sector].

In one embodiment, for purposes of diversification, an insured equitytransaction undergoes three different rounds of loss compensation: onebased on the performance of the security's subsector (20 percentexposure); one oriented around, more generally, the security's sector(20 percent exposure); and one grounded in the performance of at leastthirteen other sectors (60 percent), to provide general macroeconomicexposure that is beyond subsector and sector performance.

If we assume that a sector security class is formed at the moment whenit comprises a security class for each subsector, then as soon as thesector security class is formed, the sector security class becomesclosed, and the company begins to form a new security class for thatgiven sector. For example, as soon as the Mining sector security classcomprises security classes for each of its three subsectors—Oil and GasExtraction; Mining (except Oil and Gas); and Support Activities forMining—the security class for the Mining sector becomes closed to newparticipants.

Of course this suggests a need to define a subsector security class. Ifwe assume that a subsector security class is formed at the moment whenit generates a given amount of premiums, then as soon as this amount ofrevenue generation is achieved, the subsector security class becomesclosed, and the company begins work on forming a new security class forthat given subsector. It is also at this moment that the subsectorsecurity class joins the security class of its sector.

For example, as soon as those policies issued to cover shares of Oil andGas Extraction companies reach a point of revenue generation in excessof $700,000, the Oil and Gas Extraction subsector's security classbecomes closed to new participants. Subsequent requests for insurancefor Oil and Gas Extraction subsector shares are funneled toward thecreation of a new Oil and Gas Extraction subsector security class. Therecently-closed subsector security class for Oil and Gas Extractionjoins the security class of the Mining sector, which awaits othersubsector security class formations.

As previously suggested, the Mining sector security class is formed wheneach of its three subsectors generate at least $700,000 in revenue. Thisdoes not mean, however, that the Mining security class has available aloss compensation fund of $2.1 million. As previously noted, forpurposes of diversification, an insured equity transaction will undergothree different loss compensation processes in an effort to providegeneral macroeconomic exposure that is beyond subsector and sectorperformance. The premiums generated by each subsector will be dividedaccording to these percentages.

Ensuring Diversification

Separately but relatedly, for the purposes of diversification, a companypracticing the invention may establish a rule such that no securityshall comprise a given subsector's security class to an extent greaterthan its market share within that subsector. In other words, if theCoca-Cola Company controls 50 percent of the Beverage Manufacturingsubsector (of the Manufacturing sector), then insurance for Coca-Colastock cannot exceed 50 percent of the Beverage Manufacturing subsector.Ideally, however, a company practicing the invention could create a rulesuch that no one stock can comprise more than about 30 percent of anygiven subsector security class, ensuring considerable diversification.

The bottom line is that a subsector security class should approximatethe financial hierarchy of that subsector without compromisingdiversification. This assumes, of course, that demand for equityinsurance correlates roughly with market capitalizations and/or marketshares. If it does not, then perhaps an even more balanced form ofdiversification is possible. Ultimately, security class formation isdesigned to occur in a way that ensures that the principle ofdiversification remains intact.

Three Important Features of Subsector Security Class Formation:

INDIVIDUAL MATCHING. The very nature of security class formation allowsfor the development of an exciting and novel product feature: thematching of individual clients and their positions. In other words, acompany practicing the invention is able to provide clients withnon-identifying lists of other individual clients with positions in agiven subsector or perhaps provide an interactive medium in which aclient can monitor (but not impact) the performance of otherindividuals' positions within his or her transaction's subsector andsector. This potentially enjoyable form of monitoring the investmentsand price positions of others, without identifying information,represents a compelling product feature. A client may be interested inobserving if other clients within a given subsector or sector class areliquidating their positions for profits or losses. A company practicingthe invention can make this feature compelling also by creating orallowing for the formation of even smaller subsector and sector securityclasses with perhaps only a handful of clients in each.

RUNNING BASIS FORMATION. In one embodiment, due to the rules establishedto ensure diversification within subsector security classes, it may benecessary to have several different security classes for the samesubsector simultaneously under formation. For example, suppose a companypracticing the invention receives an order to insure 100,000 shares ofgrocer Foodarama Supermarkets (symbol FSM, AMEX) at the price of $21 pershare. With a market capitalization of approximately $25 million, thecompany is decidedly small, and the transaction is decidedly unusualrepresenting almost 10 percent of the market capitalization. The mandatefor diversification dictates its placement not within one Food andBeverage Stores subsector security class but rather several classes,across what may be a long period of time. Hence the company may havenumerous security classes for the same subsector under formation at thesame time. In the hypothetical case of the Foodarama transaction, acompany practicing the invention, could establish ten different securityclasses for the Food and Beverage Stores subsector and place 10,000shares of the 100,000 share transaction into each.

OPTIMAL PRICE DETERMINATION. The principal obstacle to developing asystem that utilizes a running basis method rested in the notion thatfew individuals would want to purchase into (i.e., join) a securityclass if he or she knew that most of the participants in that systemalready had losses on their positions, meaning that the loss thresholdpercentage may be more likely to be high. Clients would therefore timetheir purchases into various security classes following upturns in thesecurity or sector. This is problematic from a number of perspectives.It was thus determined that the solution to (or avoidance of) thisproblem could take at least two forms:

In one embodiment, the invention forms security classes on hourly ordaily bases, this provides all participants with similar entry pointsinto their positions, and largely avoids the problem of clients timingtheir purchases to coincide only with rising markets or appreciatedsecurities. However, this embodiment may also compromise the principleof diversification if the company's underwriting volume is low.

In another embodiment, the invention forms security classes over longerperiods of time, and the entry points of positions are established notaccording to the actual (and varied) entry points of clients but ratherthe optimal (i.e., highest) entry point of all security classparticipants with positions in a given security. In other words, supposea security class under formation includes two clients with insuredpositions in AOL Time Warner but different entry points: one person(Client A) purchased her stock at $56 per share on Monday while theother (Client B) purchased his stock at $54 on Tuesday. A method thatutilizes optimal price determination would effectively erase the $54entry point of Client B and subsume it with the higher, and hence moreoptimal (from a loss compensation perspective), entry point of Client A.

This benefits Client B because loss compensation allotment is thencomputed as though he entered the stock at $56 rather than $54. In otherwords, even though Client B may have suspected that other clients hadactual losses on their investments due to the decline in AOL TimeWarner's stock price from Monday to Tuesday, Client B had the incentiveto join the system, knowing that he would not join a group of “losers”(risking a high loss threshold percentage) but instead receives the mostoptimal entry point. In receiving this optimal entry point for histransaction, Client B may ultimately receive an amount of losscompensation that is greater than his actual sustained loss (if indeedClient B has a loss at the end of his coverage period and the losscompensation fund is large enough to yield a very low loss thresholdpercentage).

This method therefore encourages clients to secure the lowest entrypoint with the hope that the optimal price determination mechanism willassign to AOL Time Warner shareholding clients a price higher than theiractual entry point. This method would largely avoid the timing problem.Although some may say that the timing problem would reverse, withclients wanting “in” when stocks are on the decline, the converse isalso very much possible: when stocks are on the rise, clients would want“in,” locking in the present price, with the hope or expectation thatthe stock will continue to rise (providing a higher optimal price).Indeed, these are precisely the motivations that are involved with theassumption of most long positions in a security.

ANOTHER EXAMPLE OF OPTIMAL PRICE DETERMINATION

Suppose a client purchases Cisco Systems on Monday at $20 per share.Suppose the stock declines to $18 on Tuesday. Rather than hesitating tojoin this security class that already includes a client with a paperloss, a different client on Tuesday decides without hesitation to join,guided by the expectation that Cisco will rise and that he or she iscapable, through this association, of receiving as his or her optimalentry price at least $20. Indeed, according to this method, Cisco'ssubsector security class would assume as its common entry point forCisco shareholders that price which is most optimal for clients; in thiscase, if the $20 transaction is the highest of all class participantswith positions in Cisco, it represents the most optimal and wouldtherefore become the security class's common entry point for Ciscoshareholders. This method is included as part of the Winn-Dixie example,which is outlined below.

Significantly, a company practicing the invention may reveal differentlevels of information to prospective clients about the composition ofsecurity classes under formation. If it is determined that forthrightrevelations compel clients to join security classes, then certainly thecompany would strongly consider the continuation of such offers ofinformation if indeed such offers do not violate client privacy and areequitable to all clients.

Dividends and a Dividend Reinvestment Program in Equity Insurance

For the sake of simplicity, none of the calculations here includedividends in determining loss compensation. However, because dividendsoften provide significant returns and because, in many cases, a stock isowned less for capital appreciation and more for its dividend. In oneembodiment, the invention includes dividends in calculating losscompensation.

With this stated, however, a company practicing the invention maydetermine that many retail and institutional investors care very littleabout the dividends issued on their stocks and strongly prefer capitalappreciation. In other words, a significant amount of distributeddividends could be funneled toward greater investor value andsatisfaction if applied toward equity insurance—by the investor'scompany, on behalf of individual shareholders who opt for such dividendreinvestment and convenience. In this way, dividend reinvestment inequity insurance represents a reinvestment in their company. This typeof equity insurance promotes price stability and appreciation, inaddition to heightened investor confidence, through perceived decreasesin risk.

In furthering these interests, a company practicing the invention mayseek to institute a program through which public companies purchaseinsurance for their shareholders by utilizing shareholder dividends(with shareholder permission). Such a purchase would further theinterests of public companies in the promotion of price stability,appreciation, and investor confidence.

THE WINN-DIXIE EXAMPLE

It is now appropriate to see all of the aforementioned method in actionand also add some information along the way. In doing so, as previouslynoted, we will focus on the hypothetical transaction of a purchase of3,000 shares of Winn-Dixie Stores (symbol WIN, NYSE), purchased on Feb.1, 2000, at the price of $19.50 per share. With a transaction value,excluding commissions, of $58,500. A three percent of transaction valuepremium of $1,755 insures this equity position for six months.

Upon receiving and processing this order, the policy is placed withinthe appropriate subsector and sector security classes under formation.Winn-Dixie is a part of the Food and Beverage Stores subsector of theRetail Trade sector.

Let us suppose that the Food and Beverage Stores subsector (below)started formation on Jan. 24, 2000. Let us suppose as well that thepurchase of 3,000 shares of Winn-Dixie on Feb. 1, 2000, represented thetransaction that pushed the subsector security class's revenuegeneration beyond $167,000, a level that completes and closes thissecurity class to new participants. Let us then suppose that on Feb. 1,2000, the Food and Beverage Stores subsector security class consisted ofthese (albeit exaggerated) transactions, listed by company and, beneatheach company name, in chronological order:

(For purposes of diversification, let us say here that shares of thenation's largest grocer are not allowed to comprise more than half ofthe grocer subsector security class. Policy purchases beyond this limitare not problematic, however; our company would form another securityclass for the Food and Beverage Stores subsector and simultaneously formit alongside this security class.)

# of shares purchase date price trans value premium The Kroger Company(symbol KR, NYSE) 10,000 Jan. 24, 2000 $16.3125 $163,125 $4,893.75 5,000 Jan. 25, 2000 $16.125 $80,625 $2,418.75 15,000 Jan. 26, 2000$16.50 $247,500 $7,425  8,000 Jan. 27, 2000 $16.9375 $135,500 $4,06530,000 Jan. 28, 2000 $16.5625 $496,875 $14,906.25  5,000 Jan. 31, 2000$17.375 $86,875 $2,606.25 18,000 Feb. 1, 2000 $17.75 $319,500 $9,585Total $1,530,000 $45,900 Optimal $17.75 Price Albertson's Inc. (symbolABS, NYSE).  5,000 Jan. 24, 2000 $30.75 $153,750 $4,612.50 25,000 Jan.26, 2000 $30.4375 $760,937.50 $22,828.13 10,000 Jan. 28, 2000 $29.875$298,750 $8962.50  5,000 Feb. 1, 2000 $30.1875 $150,937.50 $4528.13Total $1,364,375 $40,931.26 Optimal $30.75 Price Safeway Inc. (symbolSWY, NYSE) 10,000 Jan. 25, 2000 $31.875 $318,750 $9,562.50  2,000 Jan.27, 2000 $35.75 $71,500 $2,145 18,000 Feb. 1, 2000 $39.00 $702,000$21,060 Total $1,092,250 $32,767.50 Optimal $39.00 Price Whole FoodsMarket (symbol WFMI, NASDAQ)  4,000 Jan. 25, 2000 $43.4375 $173,750$5,212.50  1,000 Jan. 27, 2000 $44.375 $44,375 $1,331.25  8,000 Feb. 1,2000 $46.25 $370,000 $11,100 Total $588,125 $17,643.75 Optimal $46.25Price The Great Atlantic Pacific Tea Company (symbol GAP, NYSE) 12,000Jan. 28, 2000 $27.25 $327,000 $9,810  7,000 Feb. 1, 2000 $27.00 $189,000$5,670 Total $516,000 $15,480 Optimal $27.25 Price Marsh SupermarketsClass A (symbol MARSA, NASDAQ) 10,000 Jan. 14, 2000 $15.625 $156,250$4,687.50  7,600 Jan. 25, 2000 $15.00 $114,000 $3,420  4,000 Jan. 31,2000 $14.25 $57,000 $1,710 Total $327,250 $9,817.50 Optimal $ 15.625Price Arden Group (symbol ARDNA, NASDAQ)  3000 Jan. 27, 2000 $31.25$93,750 $2,812.5 Total $93,750 $2,812.5 Optimal $31.25 Price Winn-DixieStores (symbol WIN, NYSE)  1,000 Jan. 26, 2000 $20.875 $20,875 $626.25 3,000 Feb. 1, 2000 $19.50 $58,500 $1,755 Total $79,375 $2,381.25Optimal $20.875 Price Foodarama Supermarkets (symbol FSM, AMEX)  1000Jan. 26, 2000 $21.00 $21,000 $630 Total $630 Optimal $21.00 Price

According to this example, the purchase on February 1 of insurancecovering 3,000 shares of Winn-Dixie Stores pushed the revenue figuregenerated by the Food and Beverage Stores subsector security classbeyond $167,000. Indeed, the revenue point prior to this purchase restedat $166,608.76 according to the figures above. The Winn-Dixie purchase,however, compelled a new revenue total for the subsector of $168,363.76.This effectively closed this Food and Beverage Stores subsector securityclass to new participants and impelled its binding to the encompassingretail sector security class under formation.

Flexibility in Sector Security Class

Like subsector security classes, a sector security class is defined hereby its amount of generated revenue. Because each sector has a varyingnumber of subsectors, the amount of generated revenue for each subsectorsecurity class differs according to the needs of the sector securityclass. Let us suppose an important rule here is that each sectorsecurity class should generate approximately $1 million in revenue.Hence the amount of generated revenue that defines each subsectorsecurity class depends on the needs of the sector security class. Asector security class is defined as a group of subsector securityclasses.

Significantly, a sector security class does not need to include asecurity class for each subsector. Because subsector security classeswill form at varying times, some longer and some shorter, it is mostefficient to define a sector security class as comprising at least halfof the number of subsectors within a given sector. For example, theRetail Trade sector happens to have 12 subsectors. According to ourcriteria for defining a sector security class, it is only necessary fora retail sector security class to comprise six subsector securityclasses (i.e., at least half of 12). This allows for considerableflexibility in forming sector security classes and does not compel rapidand premature formation of laggard subsector security classes.

Revenue Generation

It is necessary that each Retail Trade subsector security class generateapproximately $167,000 in revenue. When six of these retail subsectorsecurity classes are joined together to comprise a retail sectorsecurity class, an entity representing about $1 million in generatedrevenue is formed.

So let us suppose that on Feb. 1, 2000, a company practicing theinvention had overseen the formation of five Retail Trade subsectorsecurity classes: one each for the subsectors entitled “BuildingMaterial and Garden Equipment and Supplies Dealers,” “GasolineStations,” “Motor Vehicles and Parts Dealers,” “Health and Personal CareStores,” and “General Merchandise Stores.” With the completion of theFood and Beverage Stores subsector security class on Feb. 1, 2001, acompany practicing the invention would then conjoin all six of thesecompleted security classes to comprise a retail sector security class.

Meanwhile, the company would have been working on the formation of 27other sector security classes, one for each of the following:

Agriculture, Forestry, Fishing and Hunting

Mining

Utilities

Construction

Manufacturing (1)

Manufacturing (2)

Manufacturing (3)

Manufacturing (4)

Manufacturing (5)

Manufacturing (6)

Manufacturing (7)

Manufacturing (8)

Manufacturing (9)

Wholesale Trade

Transportation and Warehousing

Information

Finance and Insurance

Real Estate and Rental and Leasing

Professional, Scientific, and Technical Services

Management of Companies and Enterprises

Administrative and Support and Waste Management and Remediation Services

Educational Services

Health Care and Social Assistance

Arts, Entertainment, and Recreation

Accommodation and Food Services

Other Services (except Public Administration)

Public Administration

Round Three: Macroeconomic Security Class Formation

Security classes for each of these sectors, once formed, are thengrouped to comprise a macroeconomic security class. As with theformation of sector security classes, the company would expect thatcertain sector security classes would require longer periods of time toform that others. In order to ensure that laggard sectors do not hinderthe method, a macroeconomic security class is flexibly defined ascomprising any 14 of these 28 sectors. It is believed that any 14 ofthese 28 sectors would provide a significant measure of diversificationand broad macroeconomic exposure.

Let us suppose that on Feb. 1, 2000, the company needed the formation ofone more sector security class in order to form a macroeconomic securityclass. The following thirteen security classes, let us suppose, werealready completed:

Manufacturing (1) (with emphasis on Food and Beverages)

Manufacturing (6) (with emphasis on Defense Equipment)

Manufacturing (7) (with emphasis on Computers)

Manufacturing (8) (with emphasis on Electronics)

Finance and Insurance

Health Care and Social Assistance

Mining

Agriculture, Forestry, Fishing and Hunting

Arts, Entertainment, and Recreation

Information

Transportation and Warehousing

Utilities

Real Estate and Rental and Leasing

With the formation of the Retail Trade sector security class on February1, a complete macroeconomic security class is formed. All transactionsthat comprise this massive security class are set aside until about sixmonths have passed. Upon policy expiration, the three processes of losscompensation commence, in order, from specific (on the subsector level)to general (on the macroeconomic or global levels).

It should be noted that a fourth round of loss compensation on the basisof world stocks, providing exposure to the global economy is possible.Such a round of loss compensation becomes all the more viable when theinvention is extended internationally.

Loss Compensation

Let us suppose each sector security class represents $1 million inrevenue. If this is true, a macroeconomic security class, which is,again, comprised of 14 sector security classes, represents $14 millionin generated revenue. Not all of this $14 million, however, is intendedfor loss compensation on the macroeconomic level. Sixty percent of thissum, about $8,400,000, is reserved for this final round of losscompensation.

To follow this process, we return, again, to the February 1 purchase ofinsurance covering 3,000 shares of Winn-Dixie Stores with a transactionvalue of $58,500 ($19.50 per share). Six months later, on Aug. 1, 2000,when the term expires, Winn-Dixie shares traded at $14.50 per share, adecline of about 25.64 percent. The client thus sustained a paper lossof $15,000.

Loss compensation within the subsector. Twenty percent of the premiumsgenerated by the Food and Beverage Stores subsector are funneled towardthe establishment of a loss compensation fund for grocer subsectorparticipants only. The Food and Beverage Stores subsector security classgenerated $167,000 in revenue; 20 percent of this sum is $33,400.

At the end of the six-month period, on Aug. 1, 2000, the securitieswithin the Food and Beverage Stores subsector for which policies wereunderwritten stood as follows:

The Kroger Company Optimal price: $17.75 per share Aug. 1 closing price:$21.5625 per share ALL CLASS PARTICIPANTS WITH GAINS ON INVESTMENT. Noloss compensation Albertson's Optimal price: $30.75 per share Aug. 1closing price: $30.8125 per share ALL CLASS PARTICIPANTS WITH GAINS ONINVESTMENT. No loss compensation Safeway, Inc. Optimal price: $39.00 pershare Aug. 1 closing price: $47.00 per share ALL CLASS PARTICIPANTS WITHGAINS ON INVESTMENT. No loss compensation Whole Foods Market Optimalprice: $46.25 per share Aug. 1 closing price: $43.75 per share TWO OFTHREE PARTICIPANTS WITH LOSSES ON INVESTMENT. One participant with gain:purchased at $43.4375. For the two clients with losses: One purchased1,000 shares at One purchased 8,000 shares at $44.375 per share;transaction value $46.25 per share; transaction value $44,437; premium:$1,331,25. ($625 $370,000; premium: $11,100. actual sustained lossdollars) (1.4 ($20,000 actual sustained loss percent loss) dollars)(5.41 percent loss) Loss Dollars with Optimal Price $22,500 Actual LossDollars $20,625 Transaction Value in optimal dollars $416,250 PercentageLoss 5.41 percent The Great Atlantic Pacific Tea Company Optimal price:$27.25 per share Aug. 1 closing price: $14.8125 per share TWO OF TWOPARTICIPANTS WITH LOSSES ON INVESTMENT. For the two clients with losses:One purchased 12,000 shares at One purchased 7,000 shares at $27.25 pershare; transaction value $27.00 per share; transaction value $327,000;premium: $9,810. $189,000; premium: $5,670. ($149,250 actual sustainedloss ($85,312.50 actual sustained loss dollars) (45.64 percent loss)Curbs in dollars) (45.14 percent loss) Curbs at 20 percent loss: $65,400actual in at 20 percent loss: $37,800 sustained loss actual sustainedloss Loss Dollars with Optimal Price $236,312.50 Actual Loss Dollars$234,562.50 Loss dollars with optimal price and $103,550 curbs inTransaction Value in optimal dollars $517,750 Percentage Loss 20.0percent Marsh Supermarkets Optimal price: $15.625 per share Aug. 1closing price: $15.375 per share ONE OF THREE PARTICIPANTS WITH LOSS ONINVESTMENT. Two participants with gains: one purchased at $15.00 pershare while the other purchased at $14.25 per share. For the one clientwith losses: One purchased 10,000 shares at $15.625 per share;transaction value $156,250; premium: $4,687.50. ($2,500 actual sustainedloss dollars) (1.6 percent loss) Loss Dollars with Optimal Price $2,500Actual Loss Dollars $2,500 Transaction Value in optimal dollars $156,250Percentage Loss 1.6 percent Arden Group Optimal price: $31.25 per shareAug. 1 closing price: $37.00 per share ALL CLASS PARTICIPANTS WITH GAINSON INVESTMENT. No loss compensation Winn-Dixie Stores. Optimal price:$20.875 per share Aug. 1 closing price: $14.50 per share TWO OF TWOPARTICIPANTS WITH LOSSES ON INVESTMENT. For the two clients with losses:One purchased 1,000 shares at One purchased 3,000 shares at $20.875 pershare; transaction value $19.50 per share; transaction value $20,875;premium: $626.25. ($6,375 $58,500; premium: $1,755. actual sustainedloss dollars) (30.54 ($15,000 actual sustained loss percent loss) Curbsin at 20 percent dollars) (25.64 percent loss) Curbs loss: $4,175 actualsustained loss in at 20 percent loss: $11,700 actual sustained loss LossDollars with Optimal Price $25,500 Actual Loss Dollars $21,375 Lossdollars with optimal price and $16,700 curbs in Transaction Value inoptimal dollars $83,5000 Percentage Loss 20.0 percent Foodarama Optimalprice: $21.00 per share Aug. 1 closing price: $24.25 per share ALL CLASSPARTICIPANTS WITH GAINS ON INVESTMENT. No loss compensation

The Food and Beverage Stores subsector has a total number of $279,062.50sustained loss dollars that are desirous of compensation. A total of$33,400, however, is available for this first round of compensation. Itis thus necessary for the system to deploy the loss threshold mechanismin marking as unqualified certain loss dollars according to previouslyagreed-upon contract terms.

Prevention of drains on the system. In this example, it is clear thatthe clients who purchased shares in the Great Atlantic Pacific TeaCompany would represent a significant drag on the effectiveness of thesystem if their losses were not in some fashion stemmed. Indeed, acompany practicing the invention does not want the purchase of equityinsurance to entail a cessation of investor monitoring of the investmentor decision never to sell the security. As a result, this example makesclear that it is necessary that the company place at least a 20 percentcap on the amount of loss that a client can sustain—out of fairness toall other system participants, who also do not want drains on thesystem. Taking this 20 percent cap into consideration, the Food andBeverage Stores subsector then has a total of $142,200 sustained lossdollars that are desirous of compensation.

Round One: Loss Compensation

How should the company distribute the sum of $33,400 for this firstround of loss compensation? It is first important to compile a summaryof those clients who are desirous of loss compensation:

Whole Foods Market LOSS DOLLARS WITH OPTIMAL PRICE: $22,500 Transactionvalue in optimal dollars: $416,250 PERCENTAGE LOSS: 5.41 percent TheGreat Atlantic Pacific Tea Company LOSS DOLLARS WITH OPTIMAL PRICE AND$103,550 CURBS IN: Transaction value in optimal dollars: $517,750PERCENTAGE LOSS: 20.0 percent Marsh Supermarkets. LOSS DOLLARS WITHOPTIMAL PRICE: $2,500 Transaction value in optimal dollars: $156,250PERCENTAGE LOSS:  1.6 percent Winn-Dixie Stores. LOSS DOLLARS WITHOPTIMAL PRICE AND $16,700 CURBS IN: Transaction value in optimaldollars: $83,500 PERCENTAGE LOSS: 20.0 percent

The next step is to place in order, from greatest percentage loss toleast, these four investments sustaining loss:

The Great Atlantic Pacific Tea Company:   20 percent Winn-Dixie Stores:  20 percent Whole Foods Market: 5.41 percent Marsh Supermarkets:  1.6percent

The process of determining the loss threshold mechanism (as describedabove) then proceeds:

Total number of loss dollars desirous of compensation: $145,250 Presentnumber of loss dollars available for $33,400 compensation: NEED TO MARKAS UNQUALIFIED: $111,850 Elimination of Marsh Supermarkets yields 2,500unqualified dollars. NEED TO MARK AS UNQUALIFIED: $109,350 Eliminationof Whole Foods Market yields 22,500 unqualified dollars. NEED TO MARK ASUNQUALIFIED: $86,850 Establishment of 10 percent loss threshold for WIN($8,350) and GAP ($51,775) clients. NEED TO MARK AS UNQUALIFIED: $26,725Establishment of 11 percent loss threshold for WIN ($9,185) and GAP($56,952.50) clients. NEED TO MARK AS UNQUALIFIED: $20,712.50 [. . .]Establishment of 14 percent loss threshold for WIN ($11,690) and GAP($72,485) clients. NEED TO MARK AS UNQUALIFIED: $2,675.00 Establishmentof 15 percent loss threshold for WIN ($12,525) and GAP ($77,662.50)clients. NEED TO MARK AS UNQUALIFIED: −$3,337.50. Too many loss dollarsmarked as unqualified. FORMULA DEPLOYED: x ($517,750) + x ($83,500) =$86,850 $601,250 x = $86,850 $86,850 / $601,250 = .14444906445

Hence the loss threshold percentage for this first phase of losscompensation is 14.44 percent, meaning that all losses sustained by Foodand Beverage Stores subsector participants are confined to 14.44percent.

First round distribution. A loss threshold percentage of 14.4444906445equates to a 5.555093555 percent slice of loss compensation for both GAPand WIN clients.

For GAP clients, this entails an optimal compensation of: $28,761.50 ForWIN clients, this entails an optimal compensation of: $4,638.50 TOTALLOSS COMPENSATION DISTRIBUTION: $33,400

The functioning of the optimal pricing system. Note here that GAP andWIN shareholders have been allotted, respectively, $28,761.50 and$4,638.50 loss compensation dollars. If we were to compensate on thebasis of actual loss dollars (and not optimal dollars), GAP shareholderswould receive $28,664.28, a lesser figure because we have computed oneGAP transaction as occurring at the price of $27.25 when indeed it wastransacted at the price of $27.00. Similarly, WIN shareholders wouldreceive $4,409.36, a lesser figure because we have computed one of theWIN transactions as occurring at $20.875 when indeed it was transactedat the price of $19.50.

Nevertheless, it is important to apply the optimal price for thesetransactions so that clients, as previously discussed, have theincentive to purchase into security classes that are formed on runningbases, even those whose participants may already have paper losses. Theoptimal price mechanism also provides a significant incentive forclients to purchase equity insurance when the markets are on the rise,for this method is capable not only of compensating loss but alsoproviding profit (depending on whether there is a difference between agiven client's actual entry point and his or her designated optimalprice).

Although the order of client compensation is insignificant, let us sayhere that the clients who transacted at optimal prices are firstcompensated. The GAP client who transacted for GAP shares at $27.25 andwho sustained $65,400 in actual loss dollars is compensated $18,165.16.The other GAP client, who purchased GAP shares at the non-optimal priceof $27.00 per share, is also compensated at the optimal price, receiving$10,596.34. These figures indeed total $28,761.50.

Meanwhile, the WIN client who transacted for WIN shares at $20.875 iscompensated $1,159.63. The other WIN client, who purchased WIN shares atthe non-optimal price of $19.50 per share, is also compensated at theoptimal price, receiving $3,478.88. These figures total $4,638.51, onecent greater than $4,638.50 due to rounding.

It should be noted here that the optimal price mechanism does notpresent inequity to any client. Although it may not appear equitable toallow a client to receive loss compensation on the basis of an optimaltransaction value, this method compensates those who enter a securityclass at a time when other system participants are saddled with losseson the same security. The optimal price mechanism allows for therunning-basis formation of security classes without the disincentive ofother system participants with losses. Thus in practice this method isan equitable value proposition when executed on system-wide andconsistent bases.

Computing loss compensation on an optimal basis. The method of losscompensation proceeds on an optimal basis by first computing thetransaction value as occurring at the optimal price for all systemparticipants. The method then multiplies this number by 0.2, providingthe figure that represents the amount of insurable loss. This figure wasthen multiplied by 0.27775467775, which was the quotient of0.05555093555 (the loss compensation percentage) and 0.20. The result ofthis is the amount of loss compensation on an optimal basis.

Round Two: Loss Compensation

At the end of the first phase of loss compensation, GAP and WINshareholders had their losses reduced to 14.44 percent while the lossesof MARSA and WFMI shareholders remained at, respectively, 1.6 percentand 5.41 percent.

As with the first phase of loss compensation, the second round—which ison the more encompassing level of sector—distributes a sum that is equalto 20 percent of the revenues generated by the Food and Beverage Storessubsector. Significantly, however, each subsector that comprises thesector security class puts forward 20 percent of revenues. Because eachretail subsector generates a total of $167,000 and a retail sectorsecurity class comprises six subsectors, the total amount of losscompensation available for this phase is $200,400 ($33,400*6).

The amount of loss compensation for the Food and Beverage Storessubsector at this level depends, of course, on how well the other fivesubsectors of the Retail Trade sector security class performed.

Let us suppose that after the six-month expiration of coverage and itsfirst round of loss compensation, the Retail Trade sector security class(that which includes the above Food and Beverage Stores subsectorsecurity class) stood as follows:

Building Material and Garden Equipment and Supplies Dealers The HomeDepot, Inc. (symbol HD, NYSE) Optimal price: $62.00 per share Aug. 1closing price: $52.00 per share FOUR OF FOUR PARTICIPANTS WITH LOSSESPremium $66,800 Transaction value $2,226,666.67 Shares purchased 35,914Percent loss 16.13 Total loss dollars desirous of compensation: $359,140Lowe's Companies, Inc. (symbol LOW, NYSE) Optimal price: $47.0625 pershare Aug. 1 closing price: $42.875 per share THREE OF THREEPARTICIPANTS WITH LOSSES Premium $50,100 Transaction value $1,670,000Shares purchased 35,485 Percent loss 8.90 Total loss dollars desirous ofcompensation: $148,593.44 Fastenal Company (symbol FAST, NASDAQ) Optimalprice: $45.1875 per share Aug. 1 closing price: $61.25 per share TWO OFTWO PARTICIPANTS WITH GAINS ON INVESTMENT No loss compensation Premium$33,400 Transaction value $1,113,333.34 Central Garden & Pet Company(symbol CENT, NASDAQ) Optimal price: $10.125 per share Aug. 1 closingprice: $7.0625 per share ONE OF ONE PARTICIPANT WITH LOSS Premium$16,700 Transaction value $556,666.67 Shares purchased 54,980 Percentloss 30.25 Total loss dollars desirous of compensation: $168,376.25CURBS IN AT 20 PERCENT: Total loss dollars desirous of compensation:$111,333.33 Summary of losses: CENT shareholder loss stands at: 20.00percent HD shareholder loss stands at: 16.13 percent LOW shareholderloss stands at: 8.90 percent LOSS COMPENSATION, FIRST ROUND: Totalnumber of loss dollars desirous of $619,066.77 compensation: Presentnumber of loss dollars available for $33,400 compensation: NEED TO MARKAS UNQUALIFIED: $585,666.77 Elimination of LOW shareholders yields$148,593.44 unqualified dollars NEED TO MARK AS UNQUALIFIED: $437,073.33FORMULA DEPLOYED: x ($556,666.67) + x ($2,226,666.67) = $437,073.33$2,783,333.34 x =$437,073.33 $437,073.33 / $2,783,333.34 = .15703233376LOSS THRESHOLD PERCENTAGE: 15.70 percent AFTER FIRST ROUND OF LOSSCOMPENSATION: CENT shareholder loss stands at: 15.70 percent(Compensated $23,919.) HD shareholder loss stands at: 15.70 percent(Compensated $9,481.) LOW shareholder loss stands at: 8.90 percentGasoline Stations (With Convenience Stores) The Pantry, Inc. (symbolPTRY, NASDAQ) Optimal price: $13.75 per share Aug. 1 closing price:$10.25 per share FOUR OF FOUR PARTICIPANTS WITH LOSSES Premium $66,800Transaction value $2,226,666.67 Shares purchased 161,940 Percent loss25.45 CURBS IN AT 20 PERCENT: Total loss dollars desirous ofcompensation: $445,333.34 Casey's General Stores, Inc. (symbol CASY,NASDAQ) Optimal price: $10.50 per share Aug. 1 closing price: $11.625per share THREE OF THREE PARTICIPANTS WITH GAINS No loss compensationPremium $50,10 Transaction value $1,670,000 Ito-Yokado Co., Ltd. (symbolIYCOY, NASDAQ) Optimal price: $92.00 per share Aug. 1 closing price:$55.75 per share TWO OF TWO PARTICIPANTS WITH LOSS Premium $33,400Transaction value $1,113,333.34 Shares purchased 12,102 Percent loss39.40 CURBS IN AT 20 PERCENT: Total loss dollars desirous ofcompensation: $222,666.67 Dairy Mart Convenience Stores, Inc. (symbolDMC, AMEX) Optimal price: $3.25 per share Aug. 1 closing price: $5.50per share ONE OF ONE PARTICIPANT WITH GAIN No loss compensation Premium$16,700 Transaction value $556,666.67 Summary of losses: PTRYshareholder loss stands at: 20.00 percent IYCOY shareholder loss standsat: 20.00 percent LOSS COMPENSATION, FIRST ROUND: Total number of lossdollars desirous of $668,000.01 compensation: Present number of lossdollars available for $33,400 compensation: NEED TO MARK AS UNQUALIFIED:$634,600.01 FORMULA DEPLOYED x ($1,113,333.34) + x ($2,226,666.67) =$634,600.01 $3,340,000.01 x = $634,600.01 $634,600.01 / $3,340,000.01 =.19000000243 LOSS THRESHOLD PERCENTAGE: 19.00 percent AFTER FIRST ROUNDOF LOSS COMPENSATION: PTRY shareholder loss stands at: 19.00 percent(Compensated $22,267.) IYCOY shareholder loss stands at: 19.00 percent(Compensated $11,133.) Motor Vehicles and Parts Dealers AutoZone, Inc.(symbol AZO, NYSE) Optimal price: $26.3125 per share Aug. 1 closingprice: $22.875 per share FOUR OF FOUR PARTICIPANTS WITH LOSSES Premium$66,800 Transaction value $2,226,666.67 Shares purchased 84,624 Percentloss 13.06 Total loss dollars desirous of compensation: $290,895 AutoParts, Inc. (symbol DAP, NYSE) Optimal price: $15.9375 per share Aug. 1closing price: $8.3125 per share THREE OF THREE PARTICIPANTS WITH LOSSESPremium $50,100 Transaction value $1,670,000 Shares purchased 104,785Percent loss 47.84 CURBS IN AT 20 PERCENT: Total loss dollars desirousof compensation: $334,000 Genuine Parts Company (symbol GPC, NYSE)Optimal price: $23.0625 per share Aug. 1 closing price: $20.3125 pershare TWO OF TWO PARTICIPANTS WITH LOSSES Premium $33,400 Transactionvalue $1,113,333.34 Shares purchased 48,275 Percent loss 11.92 Totalloss dollars desirous of compensation: $132,756.25 The Pep Boys - Manny,Moe & Jack (symbol PBY, NYSE) Optimal price: $7.375 per share Aug. 1closing price: $6.375 per share ONE OF ONE PARTICIPANT WITH LOSS Premium$16,700 Transaction value $556,666.67 Shares purchased 75,481 Percentloss 13.56 Total loss dollars desirous of compensation: $75,481 Summaryof losses: DAP shareholder loss stands at 18.00 percent PBY shareholderloss stands at: 13.56 percent AZO shareholder loss stands at: 13.06percent GPC shareholder loss stands at: 11.92 percent LOSS COMPENSATION,FIRST ROUND: Total number of loss dollars desirous of $833,132.25compensation: Present number of loss dollars available for $33,400compensation: NEED TO MARK AS UNQUALIFIED: $799,732.25 Elimination ofGPC loss yields $132,756.25 unqualified dollars NEED TO MARK ASUNQUALIFIED: $666,976 Elimination of AZO loss yields $290,895 unquali-fied dollars NEED TO MARK AS UNQUALIFIED: $376,081 Elimination of PBYloss yields $75,481 unquali- fied dollars NEED TO MARK AS UNQUALIFIED:$300,600 FORMULA DEPLOYED: x ($1,670,000) = $300,600 $300,600 /$1,670,000 = .18 LOSS THRESHOLD PERCENTAGE: 18.00 percent AFTER FIRSTROUND OF LOSS COMPENSATION: DAP shareholder loss stands at: 18.00percent (Compensated $33,400.) PBY shareholder loss stands at: 13.56percent AZO shareholder loss stands at: 13.06 percent GPC shareholderloss stands at: 11.92 percent

Health and Personal Care Stores

Walgreen Co. (symbol WAG, NYSE) Optimal price: $28.8125 per share Aug. 1closing price: $30.9375 per share FOUR OF FOUR PARTICIPANTS WITH GAINSNo loss compensation Premium $66,800 Transaction value $2,226,666.67 CVSCorporation (symbol CVS, NYSE) Optimal price: $35.0625 per share Aug. 1closing price: $38.75 per share THREE OF THREE PARTICIPANTS WITH GAINSNo loss compensation Premium $50,100 Transaction value $1,670,000Alberto-Culver Company (symbol ACV, NYSE) Optimal price: $24.50 pershare Aug. 1 closing price: $30.8125 per share TWO OF TWO PARTICIPANTSWITH GAINS No loss compensation Premium $33,400 Transaction value$1,113,333.34 Duane Reade Inc. (symbol DRD, NYSE) Optimal price:$23.1875 per share Aug. 1 closing price: $24.10 per share ONE OF ONEPARTICIPANT WITH GAIN No loss compensation Premium $16,700 Transactionvalue $556,666.67

Summary of Losses:

No client has a loss on investment.

General Merchandise Stores

The May Department Stores Company, (symbol MAY, NYSE) Optimal price:$31.0625 per share Aug. 1 closing price: $24.0625 per share FOUR OF FOURPARTICIPANTS WITH LOSSES Premium $66,800 Transaction value $2,226,666.67Shares purchased 71,684 Percent loss 22.54 CURBS IN AT 20 PERCENT: Totalloss dollars desirous of compensation: $445,333.34 Sears, Roebuck andCo. (symbol S, NYSE) Optimal price: $31.4375 per share Aug. 1 closingprice: $31.00 per share THREE OF THREE PARTICIPANTS WITH LOSSES Premium$50,100 Transaction value $1,670,000 Shares purchased 53,122 Percentloss 1.39 Total loss dollars desirous of compensation: $3,240.88 J. C.Penney Company, Inc. (symbol JCP, NYSE) Optimal price: $18.8125 Aug. 1closing price: $17.50 per share TWO OF TWO PARTICIPANTS WITH LOSSESPremium $33,400 Transaction value $1,113,333.34 Shares purchased 59,181Percent loss 6.98 Total loss dollars desirous of compensation:$77,675.07 Kohl's Corporation (symbol KSS, NYSE) Optimal price: $73.125Aug. 1 closing price: (Split-adjusted) $115.25 ONE OF ONE PARTICIPANTWITH GAIN No loss compensation Premium $16,700 Transaction value$556,666.67 Summary of losses: MAY shareholder loss stands at 20.00percent JCP shareholder loss stands at 6.98 percent S shareholder lossstands at 1.39 percent LOSS COMPENSATION, FIRST ROUND: Total number ofloss dollars desirous of $546,249.29 compensation: Present number ofloss dollars available for $33,400 compensation: NEED TO MARK ASUNQUALIFIED: $512,849.29 Elimination of S loss yields $23,240.88unquali- fied dollars. NEED TO MARK AS UNQUALIFIED: $489,608.41Elimination of JCP loss yields $77,675.07 unqualified dollars. NEED TOMARK AS UNQUALIFIED: $411,933.34 FORMULA DEPLOYED x ($2,226,666.67) =$411,933.34 $411,933.34 / $2,226,666.67 = .18500000272 LOSS THRESHOLDPERCENTAGE: 18.50 percent AFTER FIRST ROUND OF LOSS COMPENSATION: MAYshareholder loss stands at 18.50 percent (Compensated $33,400.) JCPshareholder loss stands at 6.98 percent S shareholder loss stands at1.39 percentSummary Results

In order to compute loss compensation on the basis of sector performance(i.e., the second round of loss compensation), it is necessary first tocompile the results of first-round loss compensation that occurred on asubsector basis.

The subsector summary results for the above example are:

Food and Beverage Stores GAP shareholder loss stands at: 14.44 percent($74,788.50 loss dollars desirous of compensation) WIN shareholder lossstands at: 14.44 percent ($12,061.50 loss dollars desirous ofcompensation) WFMI shareholder loss stands at:  5.41 percent ($22,500loss dollars desirous of compensation) MARSA shareholder loss stands at: 1.6 percent $2,500 loss dollars desirous of compensation BuildingMaterial and-Garden Equipment and Supplies Dealers CENT shareholder lossstands at: 15.70 percent ($87,414.33 loss dollars desirous ofcompensation) HD shareholder loss stands at: 15.70 percent ($349,659loss dollars desirous of compensation) LOW shareholder loss stands at: 8.90 percent ($148,593.44 loss dollars desirous of compensation)Gasoline Stations (With Convenience Stores) PTRY shareholder loss standsat: 19.00 percent ($22,267 loss dollars desirous of compensation) IYCOYshareholder loss stands at: 19.00 percent ($11,133 loss dollars desirousof compensation) Motor Vehicles and Parts Dealers DAP shareholder lossstands at: 18.00 percent ($300,600 loss dollars desirous ofcompensation) PBY shareholder loss stands at: 13.56 percent ($75,481loss dollars desirous of compensation) AZO shareholder loss stands at:13.06 percent ($290,895 loss dollars desirous of compensation) GPCshareholder loss stands at: 11.92 percent ($132,756.25 loss dollarsdesirous of compensation)

Health and Personal Care Stores

No clients with loss.

General Merchandise Stores MAY shareholder loss stands at: 18.50 percent($411,933.34 loss dollars desirous of compensation) JCP shareholder lossstands at:  6.98 percent ($77,675.07 loss dollars desirous ofcompensation) S shareholder loss stands at:  1.39 percent ($23,240.88loss dollars desirous of compensation)

As previously noted, the second round's loss compensation fund stands at$200,400.

Loss compensation for this round proceeds as usual.

First, a ranking of securities according to percentage loss, fromgreatest to least, is compiled:

PTRY shareholder loss stands at: 19.00 percent ($423,066.34 loss dollarsdesirous of compensation) IYCOY shareholder loss stands at: 19.00percent ($211,533.67 loss dollars desirous of compensation) MAYshareholder loss stands at: 18.50 percent ($411,933.34 loss dollarsdesirous of compensation) DAP shareholder loss stands at: 18.00 percent($300,600 loss dollars desirous of compensation) CENT shareholder lossstands at: 15.70 percent (87,414.33 loss dollars desirous ofcompensation) HD shareholder loss stands at: 15.70 percent (349,659 lossdollars desirous of compensation) GAP shareholder loss stands at: 14.44percent (74,788.50 loss dollars desirous of compensation) WINshareholder loss stands at: 14.44 percent (12,061.50 loss dollarsdesirous of compensation) PBY shareholder loss stands at: 13.56 percent($75,481 loss dollars desirous of compensation) AZO shareholder lossstands at: 13.06 percent ($290,895 loss dollars desirous ofcompensation) GPC shareholder loss stands at: 11.92 percent ($132,756.25loss dollars desirous of compensation) LOW shareholder loss stands at: 8.90 percent ($148,593.44 loss dollars desirous of compensation) JCPshareholder loss stands at:  6.98 percent ($77,675.07 loss dollarsdesirous of compensation) WFMI shareholder loss stands at:  5.41 percent(22,500 loss dollars desirous of compensation) MARSA shareholder lossstands at:  1.6 percent (2,500 loss dollars desirous of compensation) Sshareholder loss stands at:  1.39 percent ($23,240.88 loss dollarsdesirous of compensation) LOSS COMPENSATION, SECOND ROUND: Total numberof loss dollars desirous of compensation: $2,644,698.32 Present numberof loss dollars available for $200,400 compensation: NEED TO MARK ASUNQUALIFIED: $2,444,298.32 Elimination of S loss yields $23,240.88unqualified dollars. NEED TO MARK AS UNQUALIFIED: $2,421,057.44Elimination of MARSA loss yields $2,500 unqualified dollars. NEED TOMARK AS UNQUALIFIED: $2,418,557.44 Elimination of WFMI loss yields$22,500 unqualified dollars. NEED TO MARK AS UNQUALIFIED: $2,396,057.44Elimination of JCP loss yields $77,675.07 unqualified dollars. NEED TOMARK AS UNQUALIFIED: $2,318,382.37 Elimination of LOW loss yields$148,593.44 unqualified dollars. NEED TO MARK AS UNQUALIFIED:$2,169,788.93 Elimination of GPC loss yields $132,756.25 unqualifieddollars. NEED TO MARK AS UNQUALIFIED: $2,037,032.68 Elimination of AZOloss yields $290,895 unqualified dollars. NEED TO MARK AS UNQUALIFIED:$1,746,137.68 Elimination of PBY loss yields $75,481 unqualifieddollars. NEED TO MARK AS UNQUALIFIED: $1,670,656.68 Elimination of WINloss yields $12,061.50 unqualified dollars. NEED TO MARK AS UNQUALIFIED:$1,658,595.18 Elimination of GAP loss yields $74,788.50 unqualifieddollars. NEED TO MARK AS UNQUALIFIED: $1,583,806.68 Elimination of HDloss yields $349,659 unqualified dollars. NEED TO MARK AS UNQUALIFIED:$1,234,147.68 Elimination of CENT loss yields $87,414.33 unqualifieddollars. NEED TO MARK AS UNQUALIFIED: $1,146,733.35 FORMULA DEPLOYED: x($1,670,000) + x ($2,226,666.67) + x ($1,113,333.34) + x ($2,226,666.67)= $1,146,733.35 $7,236,666.68 x = $1,146,733.35 $1,146,733.35 /$7,236,666.68 = .15846154047 LOSS THRESHOLD PERCENTAGE: 15.85 percentSummary ResultsIn order to compute loss compensation on the basis of macroeconomicperformance (i.e., the third round of loss compensation), it isnecessary first to compile the results of second-round loss compensationthat occurred on a sector basis.The Retail Trade sector summary results for the above example are asfollows:

PTRY shareholder loss stands at: 15.85 percent (Compensated $70,226.)($352,840.34 loss dollars desirous of compensation) IYCOY shareholderloss stands at: 15.85 percent (Compensated $35,113) ($176,420.67 lossdollars desirous of compensation) MAY shareholder loss stands at: 15.85percent (Compensated $59,092) ($411,933.34 loss dollars desirous ofcompensation) DAP shareholder loss stands at: 15.85 percent Compensated$35,969) ($264,631 loss dollars desirous of compensation) CENTshareholder loss stands at: 15.70 percent ($87,414.33 loss dollarsdesirous of compensation) HD shareholder loss stands at: 15.70 percent($349,659 loss dollars desirous of compensation) GAP shareholder lossstands at: 14.44 percent ($74,788.50 loss dollars desirous ofcompensation) WIN shareholder loss stands at: 14.44 percent ($12061.50loss dollars desirous of compensation) PBY shareholder loss stands at:13.56 percent ($75,481 loss dollars desirous of compensation) AZOshareholder loss stands at: 13.06 percent ($290,895 loss dollarsdesirous of compensation) GPC shareholder loss stands at: 11.92 percent($132,756.25 loss dollars desirous of compensation) LOW shareholder lossstands at:  8.90 percent ($148,593.44 loss dollars desirous ofcompensation) JCP shareholder loss stands at:  6.98 percent ($77,675.07loss dollars desirous of compensation) WFMI shareholder loss stands at: 5.41 percent ($22,500 loss dollars desirous of compensation) MARSAshareholder loss stands at:  1.6 percent ($2,500 loss dollars desirousof compensation) S shareholder loss stands at:  1.39 percent ($23,240.88loss dollars desirous of compensation)

Round Three of Loss Compensation

The final round of loss compensation is intended to expose policyholdersto the macroeconomy. The percentage of revenue that is allotted to thisrealm suggests the degree of significance given to the diversificationthat this realm provides. In this way one could say that equityinsurance represents commodified diversification but without the lowgrowth prospects of mutual funds.

To begin this round, it is first necessary to add up the number ofRetail Trade loss dollars that remain desirous of compensation. Addingup the figures that are present in the summary above indicates that atthis stage a total of $2,503,390.32 dollars remain desirous ofcompensation. The loss compensation fund is established at $8,400,000for this round, a figure that equals 60 percent of revenues from each of14 sector security classes.

To begin, the system must calculate an average Retail Trade sectorpercentage loss figure. Based on the figures above, the average RetailTrade sector percentage loss (excluding gains and equating eachpercentage loss as equal to each other) was 11.66 percent (186.5/16).

Utilizing sector mutual funds, one can ascertain general sectorperformance for a given period of time. Although these indicators areflawed for this purpose due to their inclusion of gains in thecalculation of percentage of depreciation, they are nevertheless usefultoward providing a general idea as to a sector's performance during agiven period of time. These mutual funds are utilized for the sake ofthis embodiment and would likely not be employed in practice.

The following are the suggested sector performances, according to mutualfund performances, for the period Feb. 1, 2000, to Aug. 1, 2000,including the retail sector for comparison purposes:

Manufacturing (6) (with emphasis on Defense Equipment)

(symbol FSDAX, from $35.08 to $40.60)

15.74 percent appreciation

Mutual fund: Fidelity Select Defense & Aerospace

Finance and Insurance

(symbol FSRBX, from $30.57 to $27.98)

8.47 percent depreciation

Mutual fund: Fidelity Select Banking

Manufacturing (7) (with emphasis on Computers)

(symbol FDCPX, from $105.09 to $109.09)

3.81 percent appreciation

Mutual fund: Fidelity Select Computers

Health Care and Social Assistance

(symbol VGHCX, from $100.01 to $121.37)

21.36 percent appreciation

Mutual fund: Vanguard Specialized Health Care

Manufacturing (8) (with emphasis on Electronics)

(symbol FSELX, from $95.63 to $104.90)

9.69 percent appreciation

Mutual fund: Fidelity Select Electronics

Agriculture, Forestry, Fishing and Hunting

(symbol FDFAX, from $34.06 to $39.96)

17.32 percent appreciation

Mutual fund: Fidelity Select Food & Agriculture

Real Estate and Rental and Leasing

(symbol FRESX, from $14.67 to $18.40)

25.43 percent appreciation

Mutual fund: Fidelity Real Estate Investment

Manufacturing (1)

(with emphasis on Food and Beverages)

(symbol FDFAX, from $34.06 to $39.96)

17.32 percent appreciation

Mutual fund: Fidelity Select Food & Agriculture

Arts, Entertainment, and Recreation

(symbol RYLIX, from $11.22 to $10.45)

6.86 percent depreciation

Mutual fund: Rydex Leisure

Mining

(symbol RYPMX, from $19.75 to $17.78)

9.97 percent depreciation

Mutual fund: Rydex Precious Metals

Retail Trade

11.66 percent depreciation

Information

(symbol FSTCX, from $91.39 to $74.46)

18.53 percent depreciation

Mutual fund: Fidelity Select Telecommunications

Transportation and Warehousing

(symbol RYPIX, from $5.85 to $6.37)

8.89 percent appreciation

Mutual fund: Rydex Transportation

Utilities

(symbol EVTMX, from $11.75 to 10.93)

6.98 percent depreciation

Mutual fund: Eaton Vance Utilities

The process of loss compensation can proceed by compiling a list ofthose depreciated sectors, in order from greatest decline to least. Keepin mind that that these figures would in practice reflect the first tworounds of loss compensation.

Information (symbol FSTCX, from $91.39 to $74.46)

18.53 percent depreciation

Mutual fund: Fidelity Select Telecommunications

Retail Trade

11.66 percent depreciation

Mining (symbol RYPMX, from $19.75 to $17.78)

9.97 percent depreciation

Mutual fund: Rydex Precious Metals

Finance and Insurance (symbol FSRBX, from $30.57 to $27.98)

8.47 percent depreciation

Mutual fund: Fidelity Select Banking

Arts, Entertainment, and Recreation (symbol RYLIX, from $11.22 to$10.45)

6.86 percent depreciation

Mutual fund: Rydex Leisure

Utilities (symbol EVTMX, from $11.75 to 10.93)

6.98 percent depreciation

Mutual fund: Eaton Vance Utilities

If the retail sector has an average loss of 11.66 percent and, aspreviously noted, a total of $2,503,390.32 dollars remain desirous ofcompensation, then one can begin to calculate general figures for thenumber of loss dollars seeking compensation that comprise thedepreciated sectors of Information, Mining, Finance and Insurance, Arts,Entertainment, & Recreation, and Utilities. (The depreciated securitieswithin appreciated sectors were most likely compensated during thefirst- and second-rounds of loss compensation.)

Let us suppose, for example, that the Information sector has a total of$3,978,373 loss dollars desirous of compensation. (If11.66x=$2,503,390.32, then x=$214,698.99828, or rounded: $214,699. So,18.53 multiplied by $214,699 yields approximately $3,978,373. Allnumbers below are approximate.)

Along these lines, the depreciated sectors contain the followingestimated numbers of loss dollars that are desirous of compensation,with the third round of loss compensation then proceeding:

Information

18.53 percent depreciation

$3,978,373 loss dollars desirous of compensation

Retail Trade

11.66 percent depreciation

$2,503,391 loss dollars desirous of compensation

Mining

9.97 percent depreciation

$2,140,550 loss dollars desirous of compensation

Finance and Insurance

8.47 percent depreciation

$1,818,501 loss dollars desirous of compensation

Arts, Entertainment, and Recreation

6.86 percent depreciation

$1,472,836 loss dollars desirous of compensation

Utilities

6.98 percent depreciation

$1,498,599 loss dollars desirous of compensation

LOSS COMPENSATION, THIRD ROUND: Total number of loss dollars desirous ofcompensation: $13,412,250 Present number of loss dollars available for$8,400,000 compensation: NEED TO MARK AS UNQUALIFIED: $5,012,250 FORMULADEPLOYED: x ($33,300,000) + x ($33,300,000) + x ($33,300,000) + x($33,300,000) + x ($33,300,000) + x ($33,300,000) = $5,012,250.$199,800,000 x = $5,012,250 $5,012,250 / $199,800,000 = .025086336 FINALLOSS THRESHOLD PERCENTAGE: 2.50 PERCENT

This final loss threshold percentage means that all losses—save 2.50percent of each—receive compensation.

The $15,000 optimal loss sustained on 3,000 shares of Winn-Dixie Storesreceives in loss compensation approximately $12,212. With insurable losscapped at $12,525 (20 percent) utilizing an optimal transaction value of$62,625, the compensation of approximately $12,212 reflects 97.50percent coverage of optimal (and capped) loss.

Let us assume that the client sold the WIN shares upon sustaining a 20percent loss in actual dollars. This would mean that the client disposedof the actual $58,500 transaction upon losing $11,700 in actual dollars,excluding commissions. The compensation of $12,212 (optimal becomesactual) means that the client received more than 100 percentcompensation of losses—indeed profiting $512, excluding commissions.

Because of this profit, this system may be capable of competing with, orsupplementing, the strategy of writing covered calls.

Important Final Notes

The automatic and upfront loss threshold device

One concern about this method pertained to the challenge of securingclients for those security classes that are unrelated to “hightechnology” and biotechnology. A company practicing the inventionprobably would not want to underwrite policies only for small- andmid-capitalization companies that are perceived as higher-riskinvestments. This method therefore has a built-in flexibility in itsability to define security classes loosely without compromising theprinciple of diversification—definitions which themselves are flexibleand subject to change depending on company projections. The system, forexample, could operate by defining a sector security class as one thatgenerates only $1,000 in revenue (and thereby allow for considerablepersonalization of client monitoring).

Significantly, however, it is important that a company practicing theinvention ensures that investors in lower-risk securities have theincentive to participant in this system. Indeed, their investments inmany ways serve as antidotes to the higher-risk investments for whichthe company likely would receive a sufficient number of orders. Thechallenge, then, is to make the system equitable and attractive to allinvestors. Toward this end, the company may provide either lowerpremiums for lower-risk investments or create an automatic lossthreshold device whose application correlates with a given security'ssector and that sector's perceived risk level. Using such company- andequity-specific information as revenue, cash balance, profit forecast,P/E ratio and beta, this correlation may vary according to individualsecurity and not just sector risk. Let us suppose, for now, that thisdevice operates on a sector basis. It would function in this case bystipulating that those clients who insure securities in high-risksectors must sustain upfront, say, a 5 percent loss. In contrast, aninvestor who seeks insurance for a security with low volatility(generally a lower-risk security) may sustain no upfront loss.

Let us say, for example, that clients who insure their Finance andInsurance stocks—generally a less volatile, less risky sector—begin toexpress frustration that our technology-invested clients routinelysecure most of a given system's loss compensation. These Finance andInsurance investors, in frustration, decide to cease insuring theirinvestments, arguing that a 5 percent loss for them is akin to a 15percent loss for a technology investor. In other words, a clientoriented toward higher-risk investments is often conditioned to greaterlosses than is a client in lower-risk investments. A company practicingthe invention, therefore, might institute a system with theaforementioned automatic and upfront loss threshold device that works toequitably level the conditioned responses to loss.

This device could make more equitable the above system and thereby helpto ensure participation from a broad variety of investors.

“Private” Security Class Formation

As another product category, it should be noted that a companypracticing the invention can also establish “private” security classeson the basis of individual equity, subsector, and/or sector. Someclients in Finance and Insurance stocks may not want any exposure to thetechnology sector, for example. As a result, the company could createsecurity classes that are comprised solely of Finance and Insurancestocks. Loss compensation would then focus exclusively on compensatingthose clients who had underperforming investments within the Finance andInsurance sector.

This value proposition may appeal significantly to clients in lower-riskinvestments while providing another option for investors who appreciatethe diversification of sector- or subsector-specific mutual funds butalso desire the possibility of higher rates of growth.

To accommodate higher-risk investors, the company could also createtechnology-specific—or even, for example,semiconductor-specific—security classes. If all participants are losing50 percent of their investments, the loss threshold percentage would berather high, although it certainly would provide some measure ofcompensation for those clients whose investments significantlyunderperform their peers. Ultimately, the exact methods and productsoffered depend considerably on market research.

The Allocation of Risk Capital to Eliminate Residue Loss

In this embodiment, the invention provides a system and method for thebrokering of deals between clients that aims to reduce or eliminate,through risk capital allocation, a given client's residue loss—thatportion of loss not compensated by the previous processes of losscompensation. This is illustrated in FIG. 8. This option is available toclients whose loss resides below the forward-oriented loss thresholdpercentage and/or above the reverse-oriented loss threshold percentage.

Like equity insurance, this option provides to clients the ability topurchase diversification without the prospect of low growth rates (i.e.,those of mutual funds). It also allows clients the opportunity toeliminate the entire portion of one's sustained loss. It is, in essence,a miniature form of venture capital (VC) or risk capital allocation madeespecially for retail and institutional loss compensation. The principaldifferences are that equity need not (and perhaps should not) exchangehands and that business plans are not involved (i.e., there is noventure other than our own): a purchase in the stake of the prospect ofanother client's equity holding or portfolio is essentially a stake inthat client's future profits.

The notion then is that a client (perhaps one with profit) offers tohelp a client with loss: “you help me this year, and I will try tocompensate you next year—for more than you gave me this year.” Tocompensate the individual who puts forward loss compensation, he or shereceives, in return, a stake in the losing client's future profits—astake sufficient to warrant the initial loss compensation. Forindividual investors, this system makes possible, for the first time,VC-like returns and VC-like excitement. What is identified in the art as“the risk capital market” becomes open, for the first time, toindividual investors who are not professional venture capitalists.

AN EXAMPLE

Suppose a client purchased General Motors stock on Nov. 1, 2000, alongwith forward-oriented equity insurance, and held onto the stock throughMar. 30, 2001 (the given policy's coverage period or term). At the endof this six-month period, this client sustained a loss on investment of15.519 percent. The loss threshold percentage for this client's securityclass was unfortunately high—at 15.529 percent—due to the general marketdecline that occurred during this period. This client was thereforeunable to receive loss compensation from the previous process of losscompensation. (This example does not reflect the three processes of losscompensation that would normally occur.)

The goal of this embodiment of the invention is, as previously noted, toreduce or eliminate this client's sustained loss of 15.519 percent.Significantly, however, this method also aims to provideprofit-sustaining clients (and any other individual, including thosewith losses or company outsiders) with the ability to purchase stakes inthe future prospects of client equities, portfolios, trading strategies,futures, options, real estate, etc., and potentially receive VC-likereturns. On the one hand, clients could perceive a stake in the futureprospect of a conservative portfolio as a low-cost means of acquiringdiversification but without the prospect of the low growth rates ofmutual funds (i.e., VC-like returns are involved). On the other hand, aclient may seek a means to purchase, for little cost, a stake in ahigh-risk equity and have the opportunity to partake in the significantreturns of this equity should they materialize.

The core philosophy involved here, then, is the redistribution of profitfor those with loss—a redistribution that stands to mutually benefitboth sides of each transaction. It is indeed the philosophy of insuranceto provide “an opportunity to share the costs of possible economicloss,” to utilize the words of Terry Lowe in his book The Business ofInsurance: A Comprehensive Introduction to Insurance (1).

This method also relies on the notion that a significant number ofindividuals would prefer, if given the choice, that their net worthremain stagnant or increase—but not decrease. Most people find wrenchingthe experience of losing their hard-earned money (i.e., seeing aninvestment decline). This particular embodiment relies upon the notionthat many individuals are willing to part with a portion of futureprofits in exchange for a reduction or elimination of the present (andperhaps painful) loss. In this fashion, a company practicing theinvention can conditionally guarantee that, through participation, aclient's net equity would never decrease—only remain stagnant orincrease.

A client with loss (CWL) decides that he or she seeks compensation forhis or her loss. Our company asks that the CWL provide certain pieces ofinformation, some of which our company may generate and others which theclient may provide. Examples of such information may include the numberof years of the client's investing experience and basic informationabout how the client acquired the loss; was the investment decision pooror did the company announce unexpected news? Certainly, if the clientwishes, he or she need not provide any of this information.

The most important part of this method rests in the notion that the CWLmakes public his or her desire for loss compensation and specifies theexact amount of desired loss compensation. A company practicing theinvention then will perform one of two processes: organize a syndicateof individuals who are willing to compensate this individual for his orher loss; or work to identify a single client who is willing to provideloss compensation. In both cases, the CWL will specify what he or sheoffers in return for loss compensation. In one embodiment, the CWL willoffer a stake in future profits that is sufficient to compensate for therisk that the CWL will not achieve future profits. This agreement willbe limited in scope: both by time and the amount of future profits thatthe risk capitalist can retain.

For example, let us suppose the GM client mentioned above decides thatshe would like loss compensation for her 15.519 percent loss. Let ussuppose this loss stood at $2,000. Due to the sum involved, a companypracticing the invention would most likely facilitate the formation of asyndicate. Let us suppose the company finds 20 members to belong to thissyndicate, each providing $100 to compensate this client.

In exchange for this compensation (i.e., to encourage the formation of asyndicate), the GM client offers a 100 percent return on the $100investments should the client achieve sufficient profits within the nextyear; she notes to prospective members of the syndicate her low-riskportfolio, valued at $100,000, and perhaps promises not to substantiallyalter this portfolio during the next year. She also notes that herportfolio need only appreciate 4 percent before she can compensate riskcapitalists. In essence, this client with loss provides members of thesyndicate with an excellent opportunity to receive exposure to certaininvestment instruments, allows for VC-like returns, and furnishesdiversification if indeed the GM client's portfolio is invested ininstruments in which members of the syndicate seek diversifyingexposure.

The number of possible arrangements between clients is innumerable. Forexample, one client, in exchange for loss compensation, may offer astake in future profits sustained in futures trading. The CWL registersthe commodities and trading activities; the risk capitalist can check inon the CWL to monitor (but not necessarily impact) these trades—likelooking through a glass window.

In another arrangement, a CWL could agree to short a given stock;investors who are adverse to shorting a stock him- or herself may likeexposure to such action through an arrangement such as this. An expertin shorting should indicate and validate this expertise in seeking losscompensation.

As another example, a CWL could offer to provide all dividends to a riskcapitalist for a given period of time (five years, for example) inexchange for loss compensation.

Or a CWL could explicate his or her trading strategy. Let us say aclient employs the Dogs of the Dow strategy. A risk capitalist mayprovide loss compensation to this individual in exchange for receivingexposure to the Dogs of the Dow strategy.

Essentially all investing strategies, portfolio combinations, investmentinstruments, and trading activities can become commodified in a way thatallow for thorough diversification and significant profit potential.

EXAMPLE

Let us say a client wanted to devote $10,000 (5 percent) of his or herportfolio to this method of VC-like risk capital investment/losscompensation. With $10,000, let us say that this client can serve asrisk capitalist to 100 different individuals. By receiving exposure tothe potential future profits of more than 100 individuals, this riskcapitalist provides him- or herself with an ample amount diversifiedexposure to different trading strategies and investment instruments towhich the investor perhaps thought he or she could never receiveexposure.

Let us say that some of these 100 individuals end up generatingsignificant profits. By the end of the year, this $ 10,000 could be asmuch as $25,000 or more, depending on those arrangements into which theclient entered. Although the risk capitalist's investments could also beless than $10,000, a company practicing the invention may offer toinsure the system's risk capitalists—representing another businessopportunity.

One should note that this method can be conducted on a very small orlarge scale, with syndicates of 1,000 people each agreeing to pay either$2 or $2,000, for example.

In conclusion, those with profit (or other individuals) redistributetheir profit (or risk capital) with the objective of securing additionalprofit (or capital), doing so in a highly diversified fashion. Althoughthe risk capitalist takes the chance that he or she will not receive areturn on investment, a company practicing the invention may insure thisrisk.

Profit Redistribution

Referring to FIG. 9, an example of a profit redistribution embodiment isillustrated. In this embodiment, a level of profit redistribution to allparticipants is provided with gains distributed until all system lossesare reduced to a previously-determined percentage or eliminated. Forexample, with 10 participants in a system: four with losses totaling$100,000 (each has $25,000 loss) and six with gains totaling $300,000(each has $50,000 profit). If profit redistribution is the only form ofloss compensation, each of the six participants with gains will havetheir profits reduced by $16,666, or 33.3 percent. The result would bethat the net worth of all system participants either remained stagnantor increased.

Another example entails varying levels of profit and loss. A profitredistribution threshold operates in the same fashion as the backendloss compensation threshold; the difference is that the mechanism wouldtreat profit percentages rather than loss percentages. In other words,this embodiment can guarantee through the backend loss thresholdmechanism that losses would be limited to a given percentage (that ofthe loss threshold). Through this profit redistribution thresholdmechanism, the invention limits profit percentages in exchange for theadded assurance that additional loss compensation is available.

In another embodiment, the method limits profit redistribution toprofits beyond a certain percentage or threshold. This percentage is setat a level that will not dissuade a large number of investors frompurchasing into the system—for example, gains beyond 50 percent aresubject to profit redistribution, but gains less than 45 percent are notsubject to profit redistribution.

Although illustrative embodiments have been described herein in detail,it should be noted and will be appreciated by those skilled in the artthat numerous variations may be made within the scope of this inventionwithout departing from the principle of this invention and withoutsacrificing its chief advantages. Such variations include premiumdistribution.

In this variation, premiums are divided among different losscompensation techniques. A standard premium is divided in half, forexample with one half applied to frontend loss compensation and theother half applied to backend loss compensation.

In another variation, premiums are differentially divided. For example,80 percent of the premium applied to frontend loss compensation and 20percent of the premium applied to backend loss compensation. In thisvariation, the investor if favored in the distribution of frontendcompensation, but less favored on the backend compensation.

In another variation, there is a roll-over operation between lossreduction funds. For example in a rising market, some funds from someloss-reduction funds may not be needed and can be rolled over to afuture loss-reduction fund.

In another variation, the investor determines the threshold, rather thanselecting a premium. In this variation, the investor can indicate a highor low tolerance for loss. For example one investor indicates that theyare willing to absorb a higher level of loss with an associated reducedpremium, and another investor indicates that they are willing to paymore premium with a lower level of loss.

Unless otherwise specifically stated, the terms and expressions havebeen used herein as terms of description and not terms of limitation.There is no intention to use the terms or expressions to exclude anyequivalents of features shown and described or portions thereof and thisinvention should be defined in accordance with the claims that follow.

1. A method implemented at least partially in a programmed computer forsharing risk of loss among a plurality of equity investment instrumentholders, the method comprising: identifying a plurality of at leastthree holders of equity investment instruments that desire sharing of arisk of loss, wherein the equity investment instruments of an individualholder are the same, while at the same time the equity investmentinstruments of each holder are diverse with respect to the equityinvestment instruments of other holders, forming a diversified set ofequity investment instruments reflecting different and diverse industrysectors or industry subsectors, further wherein performance of theequity investment instruments of an individual holder is closelycorrelated because the equity investment instruments are the same andinvestment performance across holders is not closely correlated becausethe equity investment instruments of different holders reflect differentand diverse industry sectors or industry subsectors; aggregating by theprogrammed computer, premiums to form a loss reduction fund, thepremiums at least partially contributed by the plurality of holders;determining by the programmed computer, which of the plurality ofholders incurred a loss in the respective equity investment instrumentsat a predetermined time, wherein some of the holders may incur a lossand other holders may not incur a loss; determining by the programmedcomputer, a loss threshold, wherein losses less than the loss thresholdincurred by the holders that incurred a loss are not reimbursed and atleast a portion of the losses greater than the loss threshold incurredby the holders that incurred a loss are reimbursed; determining by theprogrammed computer, losses incurred by the holders that incurred aloss, wherein the amount of loss from one holder may be different fromthe loss of another holder; and reimbursing by the programmed computer,at least a portion of the losses greater than the loss thresholdincurred by the holders that incurred a loss, wherein reimbursement to aparticular equity investment instrument holder is at least partiallydetermined by the loss of the particular holder, with consideration forlosses of the plurality of holders, where at least two holders withlosses are at least partially reimbursed and other holders may not bereimbursed, and further wherein reimbursement of losses incurred by theholders either depletes the loss reduction fund or all losses incurredby holders are reimbursed from the loss reduction fund.
 2. A methodaccording to claim 1, wherein reimbursing is from the loss reductionfund.
 3. A method according to claim 1, wherein reimbursing is from afund other than the loss reduction fund.
 4. A method according to claim1, wherein the premiums are determined as a percentage of an equityinvestment instrument price.
 5. A method according to claim 4, whereinthe equity investment instrument price is a current share trading priceat the time the premiums are aggregated.
 6. A method according to claim1, wherein the equity investment instruments are all within the same orrelated investment categories.
 7. A method according to claim 6, whereinthe investment categories include equity risk.
 8. A method according toclaim 6, wherein the investment categories include beta.
 9. A methodaccording to claim 6, wherein the investment categories are selectedfrom a group including Standard Industrial Classification (SIC) codes,North American Industrial Classification System (NAICS), securitiesindexes, and HOOVERS securities sectors.
 10. A method according to claim1, wherein the portion of the loss that is reimbursed begins at the lossthreshold.
 11. A method according to claim 1, wherein the loss thresholdis a percentage value.
 12. A method according to claim 1, wherein theloss threshold is a dollar value.
 13. A method according to claim 1,wherein the plurality of holders experiencing the largest percentage ofloss receive the largest percentage of loss reimbursement.
 14. A methodaccording to claim 1, wherein the premiums are a percentage of the valueof the equity investment instruments at approximately the time that thepremiums are aggregated.
 15. A method according to claim 1, furthercomprising creating a pool of a plurality of loss reduction funds.
 16. Amethod according to claim 15, wherein reimbursement to the particularholder comes from the pool.
 17. A method according to claim 15, whereinreimbursement to the particular holder does not come from the pool. 18.A method according to claim 15, wherein the predetermined time of oneloss reduction fund is not necessarily the same as the predeterminedtime of another loss reduction fund.
 19. A method according to claim 15,wherein reimbursement to the particular holder considers both lossescorrelated to the loss reduction fund of the particular holder, andlosses correlated to the other loss reduction funds in the plurality offunds.
 20. A method according to claim 1, further comprising allocatingrisk through risk capital allocation.
 21. A method according to claim 1,further comprising redistributing profit.
 22. A method implemented atleast partially in a programmed computer for sharing risk of loss amonga plurality of equity investment instrument holders, the methodcomprising: identifying a plurality of at least three holders of equityinvestment instruments that desire sharing of a risk of loss, whereinthe equity investment instruments of an individual holder are the same,while at the same time the equity investment instruments of holders arediverse with respect to the equity investment instruments of otherholders, forming a diversified set of equity investment instrumentsreflecting different and diverse industry sectors or industrysubsectors, further wherein performance of the equity investmentinstruments of an individual holder is closely correlated because theequity investment instruments are the same and investment performanceacross holders is not closely correlated because the equity investmentinstruments of different holders reflect different and diverse industrysectors or industry subsectors; aggregating by the programmed computer,premiums to form a loss reduction fund, the premiums determined as apercentage of a current trading price of the equity investmentinstruments at the time the premiums are aggregated and at leastpartially contributed by the plurality of holders; determining by theprogrammed computer, which of the plurality of holders incurred a lossin the respective equity investment instruments at a predetermined time,wherein some of the holders may incur a loss and other holders may notincur a loss; determining by the programmed computer, a percentage lossthreshold, wherein losses less than the percentage loss thresholdincurred by the holders that incurred a loss are not reimbursed and atleast a portion of the losses greater than the percentage loss thresholdincurred by the holders that incurred a loss are reimbursed; determiningby the programmed computer, losses incurred by the holders that incurreda loss, wherein the amount of loss from one holder may be different fromthe loss of another holder; and reimbursing by the programmed computer,the holders that incurred a loss from the loss reduction fund accordingto the percentage loss threshold, where at least two holders with lossesare reimbursed and other holders may not be reimbursed, and furtherwherein reimbursement of losses incurred by the holders either depletesthe loss reduction fund or all losses incurred by holders are reimbursedfrom the loss reduction fund.